August 2011 Thematic Report | Sector: Pharmaceuticals

Domestic Formulations

New peaks
Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406 Amit Shah (Amit.Shah@MotilalOswal.com); Tel: +91 22 3982 5423

Domestic Formulations | New Peaks

Domestic Formulations
Page No. New peaks - USD21b opportunity by 2015 ...................................... 1-5 4 A's and 4 Ailments ............................................................................ 6-8 A #1 - Affordability ............................................................................. 9-11 A #2 - Access ................................................................................... 12-13 A #3 - Awareness .................................................................................. 14 A #4 - Ailments ................................................................................. 15-17 4 Buys - Cipla, Lupin, Torrent and GSK Pharma.......................... 18-22 Ailments ........................................................................................... 23-30 Infection ............................................................................. 24 CVS Disease .................................................................... 25 Diabetes ........................................................................... 26 CNS Diseases .................................................................. 27 Pain .................................................................................. 28 Gastro-intestinal (GI) Problems ......................................... 29 Respiratory Diseases ....................................................... 30 Annexure ......................................................................................... 31-36 Company ....................................................................................... 37-142 Cipla ............................................................................ 38-49 Lupin ............................................................................ 50-61 Torrent Pharma ............................................................. 62-71 GSK Pharma ................................................................ 72-79 Sun Pharma ................................................................. 80-91 Cadila ........................................................................ 92-103 Ranbaxy ................................................................... 104-115 Dr Reddy's Labs ...................................................... 116-127 Glenmark.................................................................. 128-142

The Indian Pharma Story
4 A’s. 4 Ailments. 4 Buys

Domestic Formulations market will be USD21b in 2015, 2x over 2010. Buy Cipla, Lupin, Torrent, GSK Pharma The India domestic pharma story is founded on 4 pillars, what we call the 4 A's - Affordability, the number of players who will share the pie. Companies with a strong presence in these
Access, Awareness and Ailments. These 4 A's will enable the market to be 2x - from USD10b in 2010 to USD21b in 2015. A significant share of the market delta is explained by 4 Ailments - CVS, Diabetes, CNS and Infection. These ailment segments rank high on what we call the Attractiveness Factor, measured as incremental market size divided by ailment segments are therefore better placed. Most companies with a meaningful presence in Indian market will clock healthy growth in sales and profits. We have identified winning stocks based on a combined approach of conventional P/E-based valuation and our proprietary MEDICINES Score. Our 4 Buys are Cipla, Lupin, Torrent and GSK Pharma.

4 A’s
A#1: Affordability
Medicines are becoming more affordable led by (1) Rising per capita income, (2) Urbanization, and (3) Higher penetration of health insurance. This is driving the growth in the domestic pharma market.
2015 Indian pharma market estimate: Affordability approach
Per capita INR (1) FY01 20,786 FY06 33,827 FY11 60,048 FY16 105,668 GDP CAGR (%) (2) 10.2 12.2 12.0 Per capita pharma conspn. INR CAGR (%) (3) (4) 140 212 390 784 8.7 12.9 15.0 Multiplier (x) (5) = (4) / (2) 0.8 1.1 1.3 Pharma market INR b CAGR (%) (6) (7) 151 230 465 983 8.9 15.1 15.0

4 Ailments
CVS, Diabetes, CNS and Anti-infectives
We believe that CATS like Cardiovascular (CVS), Diabetes, Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years. Also, with rising income levels in the rural areas, anti-infectives will also record good growth over the same period. We believe these four will be the key segments of the future.
2015 Indian pharma market estimate: Ailment approach (INR b)
2010 Mkt size Share (%) 27 5.8 53 26 51 41 25 80 26 40 36 59 465 11.3 5.6 11.1 8.8 5.4 17.2 5.7 8.6 7.7 12.8 100.0 CAGR (%) 22.1 17.1 9.4 16.2 13.5 15.1 11.2 26.9 14.3 5.4 27.6 15.1 Mkt size 83 137 65 103 82 51 147 49 68 58 119 962 2015E Incr. mkt Share (%) CAGR (%) 2015 on 2009 8.6 25 56 14.2 6.7 10.8 8.5 5.3 15.3 5.1 7.0 6.0 12.4 100.0 21 20 15 15 15 13 13 11 10 15 15.6 84 39 52 41 26 67 22 28 22 60 496
Dominance

4 Buys
Presence in high-potential segments
The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS, Diabetes, anti-infectives and CNS. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance.
Company mapping with respect to therapeutic classes
High Sun Pharma, Torrent, Cadila, Cipla, Unichem, Ranbaxy, Lupin Abbott, U S V, Aventis, Sun Pharma Ranbaxy, Alkem, Aristo, Cipla, GSK, Piramal Alembic, Mankind, FDC, Macleods, Lupin Sun Pharma, Intas, Torrent, Abbott, Piramal Aventis, Ranbaxy, Unichem, Micro Labs Novartis, Cipla, Lupin Cipla, GSK Pharma

Anti-diabetic CVS CNS Gastrointestinal Respiratory Dermatology

Aventis, U S V, Medium Emcure, Piramal, Dr Reddy’s, Intas, Micro Labs IPCA Labs, AstraZeneca, Pfizer

Eli Lilly, Piramal, Micro Labs, Lupin Panacea, Ranbaxy

Cadila, Piramal, Ranbaxy

A#2: Access
People's access to medicines is improving given (1) Rising government spend on healthcare, (2) India's improving medical infrastructure, and (3) Companies' thrust on increasing rural reach. All are combined to further expand the domestic pharma market.
India’s medical infrastructure among the weakest in the world
Russia Italy Germany France US Australia UK Japan Brazil China India 97 39 83 72 31 39 39 139 24 Doctors/10,000 Hospital beds/10,000 30 9 5 12 11 26 25 23 20 34 34 43 42

Anti-infectives Gynaecology Pain/Analgesic Vitamins/Minerals Others Total

Low

Pfizer, Mankind, Dr Reddy’s, Sun Pharma, Glenmark, Biocon

CVS

Diabetes

Anti-infectives

CNS

Others

CVS, Anti-infectives, Diabetes and CNS: Key segments with relatively fewer players
0 0 CNS AF - 215 Dematology 20 Respiratory AF - 147 GI AF - 109 Diabetes AF - 396 AI AF - 337 CVS AF - 400 20 40 60 80 100

Attractiveness of international business
It is imperative to map the domestic and the non-domestic businesses of companies to take an overall view on them, as depicted below.
Company mapping: Attractiveness of domestic and international business
International Business

10 No. of Players

Favourable

Dr Reddy

Sun Pharma, Cipla, Lupin, Cadila, Torrent Pharma Ranbaxy, GSK Pharma

30

Gynaecology Vitamines Pain

Neutral

Glenmark Pharma

2015 Indian pharma market estimate: Access approach
Year 2000 2005 2010 2015 Pharmacies 322,023 410,992 550,000 736,024 CAGR 5.0 6.0 6.0 Mkt (INR b) Mkt/Pharmacy (INR) 151 467,420 230 465 936 559,622 846,018 1,272,121 CAGR (%) 3.7 8.6 8.5

40

Unfavourable

Increm ental m kt size (Rs b) 2010-15E
Note: AF=Incremental market size divided by number of players Note: Only companies covered in this report have been mapped Unfavorable Neutral Domestic Business Favorable

USD21b opportunity by 2015
We estimate the 2015 Indian domestic market size at Rs960b (USD21b) i.e. a CAGR of 16% over 2010-15 (FY11-16) founded on 4 pillars what we call as 4 A's viz. Affordability, Access, Awareness and Ailments.
Accelerating growth in domestic formulation market (USD b) Indian pharma mkt size-INR b
Approach 1 Approach 2 Approach 3 Average
GR 9.3% CA 4.1 4.7

A#3: Awareness
Health awareness in India is rising on the back of (1) Improving literacy, and (2) Rising penetration of media. This serves as an undercurrent for sustaining pharma demand.
High correlation of literacy with per capita pharma consumption
100 800 Literacy rate (%) 85 70 Per Capita Pharma spend (Rs) 600 400

CVS (2001-10 CAGR - 15.9%)
2010 53 11 45 11 38 11 24 10 14 9 13 9 Segm ent Size (INR b) Contribution to Industry (%) 2000

Diabetes (2001-10 CAGR - 17.8%)
2010 27 6 22 5 18 5 10 4 6 4 5 3 Segm ent Size (INR b) Contribution to Industry (%)
10 10.0 14.0 18.0 20 GSK 30 Dr Reddy Lupin Cadila Cipla Torrent Glenmark Sun

Earnings growth v/s valuation
We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Based on the same, the top picks are Torrent, Cipla & Lupin.
Company mapping with respect to earnings growth and valuation
FY11 P/E 40 Ranbaxy (53%, 65x) 

2009

2009

983 936 962 960

R CAG 15.6%

21.0

2008

2008

3.3

3.5

3.7

5.2

6.0

GR % CA 14.2 7.5 7.9 8.3

10.2

2005

2005

55 40 UP Madhya Pradesh Rajasthan Andhra Pradesh Orissa Gujarat Karnataka West Bengal Assam Bihar

200 0 Haryana Punjab Maharashtra Kerala
2001

2001

Tamil Nadu

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2000

22.0

26.0

30.0

FY11-13E EPS CAGR (%)

Acute larger, but chronic faster
Historically, in the Indian pharma market, the acute ailments therapy segment was the largest in terms of sales, although it experienced slower growth rates than some of the chronic therapies. Nevertheless, almost all therapy areas experienced double-digit growth.
Therapeutic mix - 2000
CNS 5% Dermato lo gy 6% A ntidiabeti c Others 3% 1 2% A ntiinfectives 1 8%

A#4: Ailments
As a trend, incidence of chronic/lifestyle ailments (cardiovascular, central nervous system, diabetes) is rising compared to acute ailments. Medicine demand from these segments will grow faster than the rest of the Indian pharma market.
Share of chronic ailments segment is on the rise (%)
Acute segment
Gastro intestinal 1% 1 Respirato y 9%

CNS (2001-10 CAGR - 14.4%)
26 6 22 6 19 5 17 7 8 5 7 5 Segment Size (INR B) Contribution to Industry (%) 2000

Anti-infectives (2001-10 CAGR - 12.4%)

Top picks: Cipla, Lupin, Torrent and GSK
We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks. These success factors correspond to the initials of the word "MEDICINES". We have rated the companies on these KSFs to arrive at a final MEDICINES Score out of a maximum possible 100.
Indian domestic pharma players: The MEDICINES scorecard
M Sun Cipla GSK Pharma** Lupin Torrent Pharma Cadila Dr. Reddy's Labs Glenmark Ranbaxy 7 6 4 5 6 6 4 2 6 E 9 7 9 6 7 7 6 3 5 D 8 8 7 6 6 7 6 5 7 I 6 6 3 6 5 5 4 6 5 C 9 6 6 8 6 6 6 6 6 I 9 7 9 5 3 5 2 5 3 N 7 5 6 6 6 7 3 5 E 9 7 6 6 8 6 5 9 3 S 13 14 14 14 14 12 12 10 9 Total 77 66 64 62 61 60 52 49 49

2010

2010

80 17 70 17 61 18 47 20 28 Segment Size (INR B) Contribution to Industry (%) 29

Therapeutic mix - 2010
A ntidiabeti c 6% CNS 6% Dermato lo gy 5% A ntiinfectives 1 6%

2009

2009

Chronic segment
2008

Gastro in testinal 1 0%

Others 1 3%

16

2008

22

23

30
2005

2005

Gynaeco lo gy 6% Cardiac 9%

84

78

77

70

P ain/ A nalgesic 1 0%

Respirato r y Vitamins/ 1% 1 M inerals 1 0%

2001

2001

18

Gynaeco lo gy 6%

P ain/ Cardiac A nalgesic 1% 1 9%

Vitamins/ M inerals 8%

2000

2000

2005

2010

2015E

19

** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable

August 2011

In fact the DF index commenced its outperformance vis-à-vis the BSE Healthcare index immediately post the credit crises of 2008.7 33.4 22.Introductions (10): Higher contribution from new launches are rated higher C .4 27.4 21.5 4.Improvement in MR productivity (10): Consistently high or improving Sales/ MR is rated higher CAGR & Scale-up (%) .670 Glenmark (318) 310 Ranbaxy ## (468) 412 * Dr.1 10.Comparative valuations (INR) Company (CMP) Top Picks Cipla (281) Lupin (450) Torrent (589) GSK (2.6 30. We believe that the outperformance reflects the relatively defensive nature of the DF business coupled with reasonable growth and good profitability.500 3.6 23.7 33.5 17.3 68.155) Others Sun (464) Target Price 361 514 762 2.4 23.446) 1.  Market share of the 4 key ailments set to rise from 40% in 2010 to 45% in 2015 Infection .2 16.1 13.2 37.8 EPS (INR) FY12E 13.  AF = Incremental market size / No..1 17. Vit and Pain Mgmt Among top 3 players in CVS and GI Ranks 3rd in GI and Pain Mgmt Ranks 2nd in Dermatology Among the leaders in AI and Dermatology Score 9 7 6 7 9 7 6 3 5 MEDICINES Score Sun Cipla Lupin Torrent Pharma GSK Pharma ** Cadila Dr.8 9 4. the AF ranking is (1) CVS . (3)  CVS.5 15.1 19.0 11.9 68.5 27.9 65.4 19.1 22.396.600 2.Mix & Market share (10): Strong presence in lifestyle segments rated higher E .1 FY12E 14. diluting the segments' attractiveness.600 8 63 5. and our overall view.330 524 Upside (%) 28 14 29 8 13 10 15 -3 -12 FY11 12.4 11. Dr.1 3.1 11.100 8 70 3.400.8 29.2 P/E (X) FY12E 21.Stock attractiveness (20): Captures outlook.5 24.1 20.0 20.9 41..6 3.1 29.2 16.7 FY11 23.8 26. (2) Diabetes .165 2.0 14.4 31.6 89.8 8.2 7.3 EV/EBITDA (X) FY11 17. But  But to arrive at the 4 key ailment segments.  Of the 4 key segments. Reddy's ## . The 4 Buys Based on detailed MEDICINES Score ranking Mix Chronic therapy contribution (%) 61 42 43 62 5 31 28 24 21 MEDICINES Score .7 47.7 27.337. maximum score (in brackets) & rating methodology M .9 FY13E 16. and (4) CNS .1 77.Distribution & reach (10): Wider distribution and reach in relevant geographies are rated higher Distribution & reach Metro/Tier I MR strength Score (% of sales) 73 2.5 16. Attractiveness Factor (AF).5 16. The outperformance is also aided by the fact that the DF business is relatively less capital intensive as compared to some of the other pharma businesses.Criteria. Obviously.8 4.078 4.3 40.3 23. Reddy's Labs Glenmark Ranbaxy 77 66 62 61 64 60 52 49 49 In last 4 years 124 304 266 151 21 197 89 105 255 Introductions Contbn to growth (%) 56 45 69 49 15 37 31 52 50 Improvement in productivity (Sales/MR.9 7 3.3 31.6 12.3 7.6 3.1 16. Gastro and Respiratory will have higher incremental market than CNS.8 17.Indian Power Sector: Story in Pictures The 4 Ailments Lifestyle ailments will grow faster than others Attractiveness Factor .0 17.2 3.7 11.6 16.4 25.1 17.0 FY13E 12. Domestic Formulations (DF) Index is an outperformer over 5 years .4 24.5 17. Non domestic business Favorability Score High 7 Medium 5 High 6 High Not applicable High High Low Medium 6 0 6 7 3 5 Earnings Growth (FY11-13) Comment (%) Score 22 9 21 7 13 6 22 16 21 12 24 55 8 6 6 5 9 3 Stock attractiveness Comment Score Neutral 13 Top pick 14 Top pick 14 Top pick Buy Neutral Neutral Neutral Sell 14 14 12 12 10 9 Equity with doctors Score 7 6 5 6 4 6 4 2 6 Comment Leader in CNS.3 22. Anti-diabetics Market leader in AI and Respiratory Leader in Anti-TB segment Ranks 2nd in CNS and 7th in CVS Market leader in Derma.2 14. INR m) 2004 2010 Score 3..Equity with doctors (10): Higher prescription share and rankings rated higher D . Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides All indices re-based to 100 August 2011 .682 6 73 60 65 68 70 66 3.500 4.3 17.6 3 9 5 2 5 3 ** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable Domestic formulations companies .2 20.0 19.5 6.6 21.CAGR & scale-up (10): Consistent high growth is rated higher I .1 4.6 25.3 31. Sensex 250 120 . size is considered as the key criteria for the attractiveness of any market or market segment.0 FY13E 17.3 18.8 9.2 26.6 5 1.4 19.Our key test to check health of ailment segments  Usually. both in terms of incremental market size and AF.500 6 7 7 6 5 7 I .7 27.2 20.7 19.215.6 20.5 12.3 28.2 30.0 17.5 FY11 14. Gynaec and 2nd in CVS.Sales Score 6 6 6 5 3 5 4 6 5 FY05-11 23 14 22 19 8 12 18 19 10 FY11-13 18 13 19 18 14 15 16 17 16 Score 9 6 8 6 6 6 6 6 6 N .4 34.1 18.3 29.4 17.2 17.1 3.6 2.4 15.Non-domestic business (10): Attractive overseas opportunity (incl one-offs) is rated higher E .7 16.7 14.Adjusted for Rs77/sh of DCF value of FTF.1 23.6 25.9 22. Infection and Diabetes (in that order) rank higher than all other segments.6 20.5 12. valuation. and also in the last 1 year BSE Healthcare Index DF Index 130 200 110 150 100 50 Feb-07 Feb-08 Feb-09 Feb-10 Nov-06 Nov-07 Nov-08 Nov-09 May-07 May-08 May-09 May-10 Nov-10 Feb-11 May-11 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 100 90 80 Oct-10 Dec-10 Feb-11 Aug-10 Apr-11 Jun-11 Aug-11 Cadila (824) 907 DRRD* (1.7 17.. the same will be shared among a very large number of players.4 Sector performance vis-a-vis benchmark Outperformer post the credit crisis The DF index has consistently outperformed the Sensex and the BSE Healthcare index as well from Sep-2009 onwards.6 3.1 10. higher the AF.4 ROE (%) FY12E FY13E 14.4 18.7 27.Earnings growth (10): High long-term earnings growth (FY05-13) is rated higher S . better  Thus. of players.5 17. we have used the measure of the prospects of incumbents.1 81.5 29.6 3.5 25.6 13.

and (2) Rising penetration of media. Also. 2015 over 2010.Lead to USD21b opportunity by 2015 The India domestic pharma story is founded on 4 pillars. 4 buys 4 A's . anti-infectives will also record good growth over the same period. and garner more than 50% of the delta in the Indian formulations market. what we call the 4 A's A #1 . Medicine demand from these segments will grow faster than the rest of the Indian pharma market. (2) Urbanization. Averaging the figure using the three approaches.Access People's access to medicines is improving given (1) Rising government spend on healthcare.Affordability Medicines are becoming more affordable led by (1) Rising per capita income. diabetes) is rising compared to acute ailments. All are combined to further expand the domestic pharma market. This is driving the growth in the domestic pharma market. August 2011 1 . we estimate the 2015 Indian domestic market size at INR960b (USD21b) i. anti-infectives and CNS are high potential segments We believe that chronic therapies like Cardiovascular (CVS). incidence of chronic/lifestyle ailments (cardiovascular. A #4 . This serves as an undercurrent for sustaining pharma demand. anti-diabetics and Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years.e. a CAGR of 16% over 2010-15 (FY11-FY16). Companies covered Top buys  Cipla  Lupin  Torrent Pharma  GSK Pharma Others  Sun Pharma  Cadila  Ranbaxy  Dr. We believe these four will be the key segments of the future.Awareness Health awareness in India is rising on the back of (1) Improving literacy. (2) India's improving medical infrastructure. and (3) Higher penetration of health insurance. with rising income levels in the rural areas.USD21b opportunity by 2015 4 A's. Based on the past data and present trends. Indian pharma mkt (INR b) Approach 1 (pg 5) Approach 2 (pg 6) Approach 3 (pg 6) Average USD b 983 936 962 960 21 4 ailments . anti-diabetics. 4 ailments. and (3) Companies' thrust on increasing rural reach.Ailments As a trend. we have estimated the 2015 (FY16) Indian pharma market using three different approaches  Approach 1 (Affordability-based): Correlation between per capita GDP and per capita pharma consumption  Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy  Approach 3 (Ailment-based): Summation of various ailment segment sizes. A #2 .CVS. central nervous system. Reddy's Labs  Glenmark A #3 .Thematic Report | Sector: Pharmaceuticals Domestic Formulations Summary New peaks .

Torrent Pharma and GSK Pharma Having identified the most attractive ailment segments. exclude companies with unfavorable non-domestic business  Screen #3: Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth and valuation  Approach 2: MEDICINES score. we have adopted two approaches to arrive at our top plays on India's domestic formulations opportunity:  Approach 1: 3-screen shortlisting process as follows:  Screen #1: Identify companies with dominating presence in high-potential ailment segments  Screen #2: Of the above.147 GI AF . Valuation summary EPS CAGR (FY11-13) Cipla Lupin Torrent Pharma GSK Pharma Sun Pharma Cadila Ranbaxy DRL Glenmark 16.2 25. which is defined by the incremental size of the opportunity per player Source: Industry/MOSL Our key conclusions from this chart: 1.3 22. to arrive at the following plot. Anti-infectives. of Players 20 30 40 Dermatology Respiratory AF . Hence.Cipla. We also note that the attractiveness factor (i. Diabetes.3 53. Lupin. CVS. Diabetes.2 24. Diabetes and CNS are large segments with relatively fewer players Increm ental m kt size (INR b) 2010-15E 0 20 40 60 Diabetes AF .Domestic Formulations | New Peaks We juxtaposed the incremental opportunity of various therapeutic segments against the number of existing players in each of these segments. anti-infectives and CNS. companies which enjoy strong positioning in these segments will be able to generate maximum value from their respective domestic formulations businesses.1 14.7 15.400 Gynaecology Vitamins Pain Note: AF is Attractiveness Factor of segment. Antiinfectives and CNS in that order 0 10 No.337 CVS AF . which is highest for CVS. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance. 3. incremental segment market size divided by number of players) is most favorable for these segments.1 15. 2.e.1 11.215 AI AF . As discussed before.396 80 100 Top 4 ailment segments are mainly based on Attractiveness Factor. CVS. based on nine key success factors for picking domestic formulation stocks Approach 1: 3-screen shortlisting process Screen #1: Identify companies with dominating presence in high-potential ailment segments The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS. Anti-infectives. August 2011 2 .8 P/E (x) (FY13) 17 18 12 24 22 20 23 18 16 4 buys . Diabetes and CNS will record maximum share of incremental market (the size of bubble indicates this).109 CNS AF .

Lupin Aventis. industry-best RoCE of over 45% and likely positioning in post patent era. Lupin and Torrent Pharma. GSK Pharma. Based on the same. Macleods. Company mapping relative to the attractiveness of domestic and international business Favourable International Business Dr Reddy Sun Pharma. Sun Pharma Ranbaxy. Unichem. Cipla. Dr Reddy's. Glenmark. view on non-domestic business is also important It is imperative to map the domestic and the non-domestic businesses of companies to take an overall view on them. Torrent. the top picks are Cipla. Mankind. Cadila. We are also positive on GSK Pharma as we believe it deserves premium valuation due to strong parentage (giving access to large product pipeline).Domestic Formulations | New Peaks Company mapping with respect to therapeutic classes Sun Pharma. GSK Pharma 3 of our 4 top picks are favorably placed in both their domestic and international businesses Neutral Glenmark Pharma Unfavourable Note: Only companies covered in this report have been mapped Unfavourable Neutral Domestic Business Favourable Source: MOSL Screen #3: Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings growth and valuation We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Piramal. Piramal. Torrent Pharma Ranbaxy. Aristo. FDC. GSK Pharma High Dominance Medium Eli Lilly. Sun Pharma. Lupin Aventis. Piramal Alembic. Micro Labs IPCA Labs. Micro Labs Cadila. Ranbaxy Panacea. Piramal Cipla. Lupin.Mankind. Pfizer Abbott. U S V. Cadila. U S V. Ranbaxy Novartis. Abbott. Piramal. Cipla. Intas. AstraZeneca. brand-building ability. Emcure. Alkem. Dr Reddy's. Torrent. Biocon Others Source: MOSL CVS Diabetes Anti-infectives CNS Companies in bold have been covered in this report Screen #2: Most Indian companies are not pure-plays. Cipla. Lupin Sun Pharma. as depicted below. Lupin Low Pfizer. Micro Labs. Cipla. Intas. Ranbaxy. August 2011 3 . Ranbaxy. Unichem. Aventis.

0 FY11-13E EPS CAGR (%) 26.0 30. Lupin..0 22. We are Neutral on Sun only due to rich valuations Sun Cipla GSK Pharma ** Lupin Torrent Pharma Cadila Dr.. GSK merits rich valuation due to superior return ratios RoCE (%) Adj. We have rated the companies on these KSFs to arrive at a final "MEDICINES Score" out of a maximum possible 100. Lupin.. RoCE . We have considered the following KSFs for evaluating the domestic formulations business (see box on page 21 for explanation). August 2011 Torrent 4 .Domestic Formulations | New Peaks Earnings growth v/s Valuation: Cipla.0 Note .RoCE adjusted for other income in P&L and Cash in Balance sheet RoCE and Adj. MEDICINES Measures M E D I C I N E S Mix & Market share Equity with doctors Distribution & reach Introductions CAGR & scale-up Improvement in MR productivity Non-domestic business Earnings growth Stock attractiveness Indian domestic pharma players: The MEDICINES scorecard M E D I C I N E Total 4 of the top 5 MEDICINES score companies correspond with Approach 1. Lupin on top . RoCE (%) Very high due to -ve capital employed GSK 30 Dr Reddy 20 Cadila Lupin Cipla Sun 25 22 7 16 DRL 13 Cadila GSK Ranbaxy Lupin 28 23 47 27 26 14 15 Glenmark S Glenmark 22 16 17 Cipla 19 25 Torrent 10 10.. combining both Approaches 1 and 2. We are Neutral on Sun Pharma only due to rich valuations. The companies with the highest MEDICINES Score are the most attractive investment ideas. 65x)  . These success factors correspond to the initials of the word "MEDICINES". Torrent. Our MEDICINES Scorecard is given below.0 18. Torrent.0 Sun 14. Thus. GSK Pharma 4 of the top 5 MEDICINES score companies correspond with Approach 1.Adj. 40 FY11 P/E (x) Ranbaxy (53%. our top picks are Cipla. Torrent and GSK Pharma. Reddy's Labs Glenmark Ranbaxy ** GSK Pharma score 7 6 4 5 6 6 4 2 6 pro-rated 9 8 6 9 9 7 8 6 6 7 9 7 3 6 9 6 6 6 8 5 7 6 5 6 3 7 7 5 6 5 6 6 4 6 2 3 5 6 6 5 5 7 5 6 3 as rating for Non-domestic business is not 7 9 5 7 6 6 6 6 8 6 6 7 5 3 9 5 3 applicable 13 77 14 66 14 64 14 62 14 61 12 60 12 52 10 49 9 49 Source: MOSL 4 buys: Cipla. RoCE are average of FY11-13 Source: MOSL Approach 2: The MEDICINES score We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks.

.2 3.5 26.491 37.7 11.2 29.0 RoE (%) 14.2 5.4 16.6 2.855 4.7 17.2 18.7 4.5 14.392 4.8 16.3 1.586 18.8 46.9 3.9 2.0 18.814 6.1 5.1 24.177 8.7 2.8 12.9 7.3 27.5 89.1 44.6 77.0 4.4 15.265 25.612 EPS (INR) 12.1 22.5 27.626 6.3 20.0 17.3 21. Sensex 250 BSE Healthcare Index DF Index .9 3.6 6.7 15.9 25.817 21.9 16.161 17.1 23.4 3.8 25.784 74.976 46.3 22.6 17.9 40.4 P/E (X) 23.1 20.419 10.145 69.4 27.1 22.0 2.1 4.2 26.608 85.7 18.1 467.0 13.7 12.052 11.4 9.5 19.041 57.9 10.6 19.2 27.8 24.3 41.4 24.2 0.3 21.5 EV/ Sales 3.3 2.4 11.0 41.4 27.0 11. and also in the last 1 year 130 120 200 110 150 100 50 Feb-07 Feb-08 Feb-09 Feb-10 May-07 May-08 May-09 May-10 Feb-11 May-11 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 100 90 80 Dec-10 Oct-10 Feb-11 Aug-10 Jun-11 Aug-11 Apr-11 All indices re-based to 100 August 2011 5 .242 93.127 22.7 6.3 33.1 24.099 11.6 68.983 89.2 30.2 17.582 9.596 29.1 28.6 17.4 RoCE (%) 15.6 3.6 29.5 37.4 2.3 49.702 3.6 3.2 4.8 2.5 25.7 16.7 30.693 PAT (INR M) 9.9 1.8 3.5 22.029 5.0 21.4 11.323 29.0 2.4 2.1 9.2 3.193 79.0 23.9 20.2 12.0 13.1 14.7 65.4 14.5 16.5 16.5 3.2 2.0 17.5 34.1 23.801 8.3 6.2 17.007 40.Domestic Formulations | New Peaks Financial & valuation summary Company Cipla Year End 03/11A 03/12E 03/13E Lupin 03/11A 03/12E 03/13E Torrent Pharma 03/11A 03/12E 03/13E GSK Pharma 12/10A 12/11E 12/12E Sun Pharma ** Includes Para-IV/oneoff upsides Cadila 03/11A** 03/12E 03/13E 03/11A 03/12E 03/13E Ranbaxy 12/10A 12/11E 12/12E Dr.952 21.334 5.3 4.3 7. Reddy's 03/11A 03/12E 03/13E Glenmark 03/11A 03/12E 03/13E Net Sales (INR M) 63.740 26.8 11.5 17.5 8.116 23.1 4.5 15.6 20.068 64.693 81.9 30.2 2.1 20.9 15..2 14.671 10.3 27.5 3.8 25.5 20.717 59.4 17.4 31.6 29.1 -54.1 26.9 15.6 68.5 26.8 5.1 31.754 90.5 18.7 29.4 17.9 EV/ EBITDA 17.7 8.7 2.3 20.760 13.8 13.2 Domestic Formulations (DF) Index is an outperformer over 5 years .2 15.9 2.8 3.2 29.6 5.8 22.5 25.3 16.8 18.567 7.2 2.3 2.7 11.615 13.2 7.418 2.4 27.4 19.7 31.548 4.4 45.6 7.1 47.4 10.913 11..5 12.584 5.3 25.0 15.2 22.4 3.2 25.3 27.1 19.6 81.991 7.1 25.5 23.8 3.1 16.4 14.725 3.1 P/BV (X) 3.4 5.4 17. (%) -3..601 75.1 19.2 17.7 10.4 15.9 28.302 51.8 6.921 57.7 EPS GR.1 12.6 8.4 -8.1 25.7 17.005 74.2 33.5 17.6 18.7 17.5 16.8 17.8 15.9 20.214 65.

per capita pharma consumption CAGR was 8. and the multiplier increased to 1. Access People's access to medicines is improving given (1) Rising government spend on healthcare.8x of per capita GDP CAGR. This serves as an undercurrent for sustaining pharma demand (see page 14). Averaging the market size arrived using each approach. With rising income. 2x over 2010 The India domestic pharma story is founded on 4 pillars. per capita pharma consumption CAGR rose to 12. and (3) Higher penetration of health insurance. incidence of chronic/lifestyle ailments (cardiovascular. diabetes) is rising compared to acute ailments. We discuss below the methodology under the three approaches. August 2011 6 . (2) India's improving medical infrastructure. (2) Urbanization. Over the next five years (FY06-11). we have estimated the 2015 (FY16) Indian pharma market using three different approaches  Approach 1 (Affordability-based): Correlation between per capita GDP and per capita pharma consumption  Approach 2 (Access-based): Trend in pharmacies and sales per pharmacy  Approach 3 (Ailment-based): Summation of various ailment segment sizes.7%.9%. central nervous system.1x. All are combined to further expand the domestic pharma market (see page 12). pharmaceuticals accounts for a higher share of overall household spend. FY01-06. as indicated by the rising multiplier of per capita pharma consumption CAGR to per capita GDP CAGR. This is driving the growth in the domestic pharma market (see page 9). Thus. Approach 1: Affordability-based Correlation between per capita GDP and per capita pharma consumption A #2 A #3 A #4 Approach 1: Affordability Market size: INR983b We see a strong correlation between India's per capita GDP and per capita pharma consumption. 0. Ailments As a trend. we estimate the total India market size at USD21b by 2015. and (3) Companies' thrust on increasing rural reach. Awareness Health awareness in India is rising on the back of (1) Improving literacy. and (2) Rising penetration of media. USD21b opportunity by 2015 Based on the past data and present trends. what we call the 4 A's - A #1 Affordability Medicines are becoming more affordable led by (1) Rising per capita income. Medicine demand from these segments will grow faster than the rest of the Indian pharma market (see page 15).Domestic Formulations | New Peaks Main Report 4 A's and 4 Ailments To drive USD21b opportunity by 2015.

000 pharmacies and long-term CAGR of 4. Applying a 1.0 465 846. we have back calculated number of pharmacies for 2005 and 2000 based on the 2010 estimate of 550.0 230 559. we arrive at the total Indian pharma market size of INR962b.0 Multiplier (x) (5) = (4) / (2) 0.668 10.6 2015 736.3x multiplier.9 15. INR CAGR (%) (3) (4) 140 212 390 784 8. we believe the growth will accelerate.0 Source: Industry/MOSL Approach 2: Access-based Trend in pharmacies and sales per pharmacy Our methodology here is as follows  Consider the growth in number of pharmacies in 2005 over 2000.3 Pharma market INR b CAGR (%) (6) (7) 151 230 465 8.048 105.2 12.Domestic Formulations | New Peaks We estimate FY11-16 per capita GDP CAGR of 12%. and 2010 over 2005  Calculate the CAGR in average market size per pharmacy over 5-year time frames  Extrapolate both of the above for 2015 to arrive at the pharma market size.5 Note: As precise data on pharmacies is not available.1 1.786 33. August 2011 7 . Going forward.018 8.7 2010 550.420 2005 410.7 12. we arrive at FY16 per capita pharma spend of INR784. We have analyzed the 2000-2010 growth trend in each of these segments. especially in chronic ailment therapeutic segments such as CVS.622 3.9 15. Multiplying by the then expected population.0 936 1.827 60.8 1.5% Source: Industry/MOSL Approach 3: Ailments-based Summation of various ailment segment sizes Approach 3: Ailments Market size: INR962b The Indian pharma market can be broken down into 10 major therapeutic segments.272.0 Per capita pharma conspn. we estimate the pharma market size at INR983b. 2015 Indian pharma market estimate: Affordability approach Per capita GDP INR CAGR (%) (1) (2) FY01 FY06 FY11 FY16 20.121 8. Approach 2: Access Market size: INR936b 2015 Indian pharma market estimate: Access approach Year Pharmacies CAGR (%) Mkt (INR b) Mkt/Pharmacy (INR) CAGR (%) 2000 322. a CAGR of 15% from current level of INR465b. Adding up the individual segments in 2015.023 151 467.992 5.000 6.024 6. CNS and anti-diabetics.1 983 15.2 12.

Accelerating growth in domestic formulation market (USD b) % C R AG India will be among world's top 10 pharma markets by 2015 2015 market size (US$b) 444 Grow th over 2005 (x) 3.4 1.0 15 R AG 10.6 13.0 .3 25 38 Canada China 1. It estimates 2015 market size of USD20b (INR920b @ INR/USD of 46).6 8.1 17.5 7.5 8.3 7. In the process.2015 over 2010 2000 Anti-diabetic CVS CNS Gastrointestinal Respiratory Dermatology Anti-infectives Gynaecology Pain/Analgesic Vitamins/Minerals Others Total 5 13 7 17 16 8 29 9 14 15 19 151 2010 27 53 26 51 41 25 80 26 40 36 59 406 83 56 137 84 65 39 103 52 82 41 51 26 147 67 49 22 68 28 58 22 119 60 962 436 Source: Industry/MOSL 2015 Indian domestic pharma market of USD21b Average of the three approaches Indian pharma mkt (INR b) Approach 1 Approach 2 Approach 3 Average USD b 983 936 962 960 21 Averaging the figure arrived using the three approaches.3 7. a CAGR of 16% over 2010-15 (FY11FY16). India will improve its global rank in terms of value from 14 currently to top 10 by year 2015.9 6. culminating in the MEDICINES framework to zero-in on our top picks.7 1.5 3.6 12.Domestic Formulations | New Peaks 2015 Indian pharma market estimate: Ailment approach (INR b) Market size 2005 10 24 17 24 22 13 47 8 21 28 18 212 CAGR (%) 00-05 05-10 10-15E 17.2 1.7 10. 8 August 2011 .9 2.3% 5.1 22.2 4.1 11. we estimate the 2015 Indian domestic market size at INR960b (USD21b) i.7 3.4 16.2 %C 14. McKinsey has also estimated the Indian domestic pharma market after considering factors like income demographics.0 6. medical infrastructure.3 19.3 7.8 1.5 15.3 5.8 1.2 1. Independently.7 46 38 Germany France 25 32 UK Italy 25 Spain 19 20 Mexico Brazil 15 15 Turkey South Korea 20 India US 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Japan Source: Mckinsey/MOSL We proceed to discuss the key issues under each of the 4 As.7 Mkt size 2015E Incremental mkt .2 13.1 9.1 21.1 4.9 14.4 27.9 1.6 CAGR 9.3 2.2 82 1.3 3.5 -2.e.9 2.9 -1.9 1.2 26.2 13.8 25 21 20 15 15 15 13 13 11 10 15 15. disease incidence and penetration of health insurance.2 8.

156 23. India's per capita GDP will keep rising steadily for the next several years. The core NTD thesis is this: It took India about 60 years post independence to clock the first trillion dollar of GDP.320 Source: MOSPI/MOSL FY16 105.728 1. urbanization.811 FY19E 5th USD tn 1.741 4.017 FY06 33. India's next trillion dollar (NTD) will come in just 4-5 years.844 FY09 48.314 FY12E FY13E FY14E 2.299 FY17E FY18E Source: MOSPI/MOSL With population growing at a much lower rate than GDP.5 years 3. India's per capita GDP is steadily rising (INR) 20. at constant exchange rates.909 FY16E 3.929 FY05 30.696 FY10 53. With nominal GDP growth of 14-15%.230 946 1. we published our first note on the concept of NTD (next trillion dollar of India's GDP).5% CAG R FY15 94.263 2nd USD tn 4 years 1.476 FY01 FY02 FY03 FY04 25. Every successive trillion dollar GDP would take lesser time and by 2020 India would comfortably reach a USD5t GDP assuming 8% real GDP growth coupled with 5% estimated inflation.5 years 1st USD tn 58 years 1. and health insurance penetration will drive pharma spend A #1 Affordability India's NTD journey will steadily drive up per capita income In 2007.456 461 21 33 57 150 293 451 479 508 600 721 837 By FY20 India GDP would triple from the current level and be almost ~5 times the level of FY08 4th USD tn 2 years 3rd USD tn 3.679 FY11 60.243 5.786 22.214 1.519 FY08 43.195 FY13 75.827 FY07 38.214 FY14 84.566 FY15E 2. India's NTD era — next trillion dollar of GDP getting added in successively lower time (USD b) 4.048 FY12 67.668 FY20E FY51 FY60 FY70 FY80 FY90 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 August 2011 9 .215 India's rising per capita GDP augurs well for domestic pharma market 11.Affordability Rising per capita income.Domestic Formulations | New Peaks A #1 .969 2.

and (3) wider prevalence of chronic diseases.0 Brazil Russia China India Share of tier-1 markets in pharma demand (%) Rising urbanization is a positive 62 61 60 60 63 Urbanization: a positive for pharma demand Increasing urbanization leads to higher demand for pharma products based on factors such as (1) higher affordability. household income spent on healthcare US France Germany 11 10. including pharmaceuticals. Russia (5.7 8.7 420 370 280 220 200 130 120 60 60 Romania Germany Turkey 20 10 Pakistan China 55 8 BRICS (avg) India Canada Australia Italy Brazil UK Japan Russia China India UK Canada France BRICs healthcare as % of GDP India is the lowest 8.Domestic Formulations | New Peaks Higher per capita income will boost spend on pharmaceuticals There is a direct co-relation between per capita income and spend on healthcare. substantially lower than developed markets and even BRIC peers . implying growth in pharma demand. reflecting the very basic level of healthcare provided by the government. As India's per capita income grows going forward.3%). healthcare spend is expected to witness one of the highest growth rate among all categories over the next two decades. India's expenditure on health amounted to 4% of GDP (2008). In comparison.3 4.4 4. BRIC peer governments accounted for ~50% of their respective country's healthcare spend.2%) and China (4. Currently. public health expenditure accounted for less than 30% of India's total healthcare costs (2008). Thus. economic growth coupled with improving government finances should narrow the gap. yet only accounts for 1% of the total amount spent on health globally.4 8.4 10. the trend of rising urbanization in India is a key positive for growth in pharma demand.1 8.Brazil (8.4 5.2 Large population with low healthcare penetration presents huge opportunity India has 16% of the world's population. Further.1 Source: Industry/MOSL 15. 10 2006 2007 2008 2009 2010 August 2011 Mexico Russia Japan Italy Spain Brazil USA . Share of India's tier-1 markets has increased from 60% in 2006 to 63% in 2010. 4. (2) better medical infrastructure.9 8.3 4. India has one of the world's lowest per capita spend on pharmaceuticals.4%). which is insufficient to meet the health needs of the entire population.4 8 5. Going forward. Healthcare spend is expected to grow to 13% of GDP by 2025. India has one of the lowest per capita spend on pharmaceuticals 700 620 490 450 (USD) % of avg.

Going forward. health insurance should get a boost by way of various regulatory reforms like non-life tariff deregulation.3 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10 Source: IRDA/MOSL August 2011 2050 11 . Health insurance penetration in India is rising Premium (INRb) (Rs b) Premium (% of GDP) 0. increase in FDI limit.12% 0.13% Per capita premium almost quadruples in 5 years (INR) 71.5 57.1 28.Domestic Formulations | New Peaks Metro and Tier-1 cities market share up from 60% in 2006 to 63% in 2010 METROS 21 19 33 CLASS I TOWNS 21 19 20 19 32 CLASS II TO VI 18 19 32 RURAL India . lower capital requirements for players.9 20. etc.06% 83.10% 0.9 45.07% 0.1 66.2 FY06 32.4 0.3 51.population distribution Urban population (%) 72 17 20 32 Rural Population (%) 63 71 70 70 68 66 60 40 57 43 53 47 51 49 54 46 28 } 31 28 29 30 30 32 34 37 Tier-1 mkt 29 CY2007 29 CY2008 30 CY2009 31 2000 2005 2009 2010 2015 2020 2025 2030 2035 2040 2045 CY2006 CY2010 Source: Industry/MOSL Rising health insurance penetration to improve affordability Currently around 300 million people in India are covered under health insurance. Increasing penetration of health insurance over the next few years will spur demand for pharmaceuticals as it becomes possible for patients to afford more sophisticated and more expensive therapies.3 22. and this number is expected to double by 2020.

China and Thailand fare much better than India with 24-30 beds per 10. the government has announced plans to take its spending on healthcare to 3% of GDP from the current level of about 1%.17b allocated in 2009-10.7 A #2 . over the next few years. the government plans to create health cover for approximately 400m people. Government spending on healthcare will play a major role in increasing the penetration of pharmaceuticals especially in rural areas. This was demonstrated in the union budget for 2010-2011. helping pharma demand. diagnostic laboratory services market (estimated at USD750m) is expected to grow @ 20-25% p.a. Even other developing countries like Brazil. August 2011 12 .3 16. with rising number of students gaining admission to medical colleges. 19m families have already been covered and implementation seems to be on track.000.3 108. The budget allocation has been significantly increased for rural healthcare.5 Grow th (%) 21. Under Rashtriya Swasthya Bima Yojna (National Health Insurance Scheme).000 people compared to 30-40 in US and Western Europe. India's current doctor-population ratio at 5 per 10. Union Budget 2011 Source: Ministry of Health/MOSL Improving healthcare infrastructure The healthcare infrastructure in India is likely to improve and will be a critical growth driver for pharmaceuticals.Access Rising government spend on healthcare. when the healthcare expenditure outlay was increased to USD5.Domestic Formulations | New Peaks A #2 .95b from less than a USD5. with the government also announcing plans to set up six "All India Institute of Medical Sciences "(AIIMS) institutions across the country. Likewise. Going forward. India's healthcare infrastructure is at nascent stage compared to western countries. Industry data suggests the number of hospital beds in India is likely to double by 2015. India has only 9 hospital beds per 10.Access Allocation under National Rural Health Mission (INR b) 140.1 10. Rising government spend on healthcare improves people's access to medicines. However.000 is the lowest among major countries.9 22. Currently.3 14. Government spend has grown at 18% CAGR over FY06-09 and is translating into higher level of access in Tier II and rural markets. Rising government spend on healthcare Helathcare Exp (Rs b) Healthcare Exp (INR b) 19.9 90 10. Further. better infrastructure will improve availability Rising government spend on healthcare Healthcare for all is high on the agenda of the present Indian government.5 119. this ratio is set to improve going forward.1 280 315 348 415 454 521 632 739 907 286 997 9.3 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 Source: Economic Survey.5 2.0 67.7 10.

increasing government spend on healthcare.377 736.Rising trend here as well 757.rising trend No of medical colleges in India No of students entering medical colleges ('000) 30 33 35 No. improvement in healthcare infrastructure.080 660.India among world's lowest Doctors per 10.India the lowest the among world majors 139 Rus s ia Italy Germany Fr anc e A r gentina US A us tr alia UK Mex ic o Japan Br az il China Pakis tan India 5 7 12 11 20 20 30 26 25 23 34 34 43 42 Japan Rus s ia Germany Franc e A us tralia Italy UK Canada US China Braz il India 9 39 39 39 34 31 30 24 72 83 97 Source: WHO Students entering medical colleges and number of colleges . but rural markets contribute to only 17 per cent of the overall pharmaceutical market's sales.000 people . and growing health awareness etc is expected to drive pharma growth in these markets. namely.Domestic Formulations | New Peaks Hospital beds per 10.043 682.000 . In the last few years both MNCs and Indian pharma companies are increasing their attention to tier 2 markets. The above-mentioned factors.743 708. of allopathic doctors registered with state medical councils . Growth in tier-2 markets showing signs of catching up (%) METROS CLASS I TOWNS CLASS II TO VI 26 23 21 18 14 11 8 15 16 18 18 16 13 9 2 17 RURAL CY2007 CY2008 CY2009 CY2010 Source: Industry/MOSL August 2011 13 .856 25 18 7 165 FY96 FY01 FY05 189 229 26 29 242 262 266 289 300 FY06 FY07 FY08 FY09 FY10 2005 2006 2007 2008 2009 Source: National Health Profile Companies are focusing on increasing their rural reach Currently around 67 per cent of India's population or 742 million people live in rural areas.

6 TV penetration (%) 56. radio and internet. As seen in the graph below. Rising media penetration is a positive for healthcare awareness and pharma demand Total TV HH (m) 53. Punjab and Haryana have higher per capita spend on pharmaceuticals compared to states with low literacy rates like Bihar.print.e.4 52. affordability).1 108 112 118 129 136 142 62 70 78 94 105 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 Note: HH stands for Households Source: Industry/MOSL Kerala August 2011 14 .2 57 63 66 C&S HH (m) C&S penetration (% of TV Household) 73 77 51.Domestic Formulations | New Peaks A #3 .Awareness Rising literacy levels and media penetration is improving health awareness A #3 . Higher literacy typically leads to higher per capita income (i. Maharashtra. Our study of pharmaceutical consumption and literacy rates among various states of India confirms a strong correlation between literacy rate and pharma demand. Higher media exposure leads to better awareness on a whole range of issues including healthcare. states with high literacy rates like Kerala.Awareness High correlation between literacy and per capita pharma consumption We believe literacy is one of the key factors driving awareness about healthcare in general and pharmaceuticals in particular. In fact. which in turn drives pharma demand.4 60. Rajasthan and Assam.000 20.000 60. thus favourably influencing pharma demand. High correlation of literacy with per capita pharma consumption Literacy rate (%) 100 85 70 55 Tamil Nadu 40 UP Karnataka Rajasthan Orissa Madhya Gujarat West Bengal Assam Bihar Andhra Per Capita Pharma spend (Rs) 800 600 400 200 0 Haryana Punjab Maharashtra Kerala Literacy rate in India is rising Literacy rate (%) Per CapitaGDP (Rs) 80. A #1.3 58.000 Tamil Nadu 0 Punjab Maharashtra 81 115 2010 100 75 50 25 0 UP Orissa Rajasthan Karnataka Madhya Gujarat West Bengal Assam Bihar Andhra Haryana Source: Industry/MOSL Rising media penetration also leads to higher awareness Penetration of all forms of media is rising in India . TV. UP.000 40. literacy also has an indirect impact on pharma consumption.

acute and chronic. UK and Japan. By 2015.g. (See pages 24-30 for profiles of major ailments in India.Ailments Lifestyle drugs and anti-infectives hold the biggest potential A #4 . can be alleviated but not cured.g. the share of CATS stood at 22% of pharmaceutical market in India versus 55-65% in developed markets like US. In 2006. Acute ailments may turn chronic if they remain unresolved. Due to relatively poor sanitation conditions. The incidence and prevalence of non-communicable diseases is rapidly increasing due to demographic changes (e. Unlike acute ailments. the proportion of acute to chronic is higher in developing countries compared with developed countries. Higher prevalence coupled with higher prescription compliance (due to improved affordability) is likely to drive much stronger growth in chronic ailment therapeutic segments (CATS). An acute ailment can be described as a condition of rapid onset and severe symptoms of brief duration e. Therapeutic mix of major countries (%): India currently is an acute ailments market Chronic Acute Trend in India's therapeutic mix (%) Share of chronic ailments segment is on the rise Acute segment 16 Chronic segment 35 22 42 23 45 45 65 73 30 84 65 58 55 55 35 27 78 77 70 US Germany Japan UK China India 2000 2005 2010 2015E Source: McKinsey/MOSL Changing disease profile to boost demand for chronic therapies India is undergoing a transition in terms of disease profile. and (2) are of longer duration e. blood pressure. with current medical knowledge. urbanization) and lifestyle changes resulting from socioeconomic development (e. etc. stress). obesity. the share of CATS is expected to rise to 30% of the then Indian market. infectious disease like common cold.g. chronic ailments (1) do not usually resolve of their own accord. Chronic ailments can be described as conditions that.g. drugs addressing infectious diseases are predominant in most developing countries. diabetes. asthma. Hence.) August 2011 15 . fever etc.Domestic Formulations | New Peaks A #4 .Ailments India has so far been an acute ailments market Ailments can be of two types .

Domestic Formulations | New Peaks Prevalence rates of key chronic ailments to rise 4.5% share each over CY00-10.0 2000-10 CAGR (%) 15.3 2.7 2.2 0. Access and Awareness. Among key therapies. This is attributed to the preceding three As .9 3.Affordability.8 3. Trend in major therapeutic segments Market Size (Rs b) 12.6% followed by CVS (cardiovasculsar system) at 15%. the acute ailments therapy segment was the largest in terms of sales. both anti-diabetics and CVS gained ~2.3 0.7 2005 2015 (% of population) Market sizes of major corresponding therapies (INR b) 2005 Market size 2005 (Rs b) 2015 Market Size 2015 (Rs b) 137 83 82 24 10 Coronary heart disease Diabetes 22 Respiratory Source: Industry/MOSL India: Therapeutic trend (2000 to 2010) Historically. whereas anti-infectives and vitamins & minerals lost 2% share each.3 11.2 9.9 9.5 2.4 19. almost all therapy areas experienced double-digit growth over the 2000-10 period. in the Indian pharma market.7 1.9 11. anti-diabetics was the fastest growing in terms of sales with CY00-10 CAGR of 19.8 Dermatology 6% 80 Antiinfectives 51 Gastrointestinal 41 Respiratory 36 Vitamins/Minerals 40 Pain/Analgesic 53 Cardiac 26 Gynaecology 25 Dermatology 26 CNS 27 Antidiabetic Gynaecology 6% Pain/ Analgesic 10% Vitamins/ Minerals 10% Respiratory 11% Cardiac 9% Indian pharma market therapeutic mix (2005) Antidiabetic 4% CNS 7% Dermatology 5% Gynaecology 3% Others 8% Antiinfectives 21% Gastrointestinal 11% Indian pharma market therapeutic mix (2010) Antidiabetic 6% CNS 6% Dermatology 5% Pain/ Analgesic 9% Others 13% Antiinfectives 16% Gastrointestinal 11% Respiratory 9% Cardiac 11% Vitamins/ Minerals 8% Source: Industry/MOSL Cardiac 10% Pain/ Analgesic 9% Vitamins/ Minerals 13% Respiratory 9% Gynaecology 6% August 2011 16 . Nevertheless. although it experienced slower growth rates than some of the chronic therapies.6 Indian pharma market therapeutic mix (2000) Antidiabetic Others 12% 3% Antiinfectives 18% Gastroin testinal 10% CNS 5% 10.8 14.1 10. In terms of therapeutic segment market share.2 Coronary heart disease Diabetes Asthma Obesity Cancer 2.

Diabetes. We also note that the attractiveness factor (i. CVS. Antiinfectives and CNS in that order 0 10 No. We juxtaposed the incremental opportunity of various therapeutic segments against the number of existing players in each of these segments. of Players 20 30 40 Dermatology Respiratory AF .Domestic Formulations | New Peaks CVS. Hence. Diabetes. 2.337 CVS AF . As discussed before. which is highest for CVS. CNS and Anti-infectives will be the high potential segments We believe that CATS like Cardiovascular (CVS). CVS. We believe these four will be the key segments of the future. with rising income levels in the rural areas. Diabetes and CNS will record maximum share of incremental market (the size of bubble indicates this). to arrive at the following plot. 2015 over 2010. Diabetes and CNS are large segments with relatively fewer players Increm ental m kt size (INR b) 2010-15E 0 20 40 60 Diabetes AF . Diabetes. Also. and garner more than 50% of the delta in the Indian formulations market.396 80 100 Top 4 ailment segments are mainly based on Attractiveness Factor.400 Gynaecology Vitamins Note: AF is Attractiveness Factor of segment. companies which enjoy strong positioning in these segments will be able to generate maximum value from their respective domestic formulations businesses. anti-infectives will also record good growth over the same period. incremental segment market size divided by number of players) is most favorable for these segments. which is defined by the incremental size of the opportunity per player Source: Industry/MOSL Our key conclusions from this chart: 1. 3. August 2011 17 . Anti-infectives.215 AI AF .147 Pain GI AF . Central Nervous System (CNS) will account for a major chunk of the incremental market over the next 5 years.e.109 CNS AF . Anti-infectives.

Approach 1: 3-Screen shortlisting process Screen #1 Presence in high potential segments Identify companies with dominating presence in high-potential ailment segments The chart below maps the positioning of pharmaceutical players in the key therapeutic segments of CVS. we have adopted two approaches to arrive at our top plays on India's domestic formulations  Approach 1: 3-screen shortlisting process as follows:  Screen #1 . Sun Pharma Ranbaxy. Ranbaxy Novartis. Micro Labs. Aventis. Piramal. Torrent and GSK Pharma Having identified the most attractive ailment segments. Dr Reddy's.Cipla. Unichem. GSK Pharma. U S V. Ranbaxy. Piramal Cipla. Cipla. U S V. Pfizer Abbott. Cipla. Ranbaxy.Juxtapose the Screen #2 surviving companies vis-à-vis earnings growth and valuation  Approach 2: MEDICINES score. anti-infectives and CNS. Cipla. Diabetes.Mankind.Domestic Formulations | New Peaks 4 Buys Cipla. Company mapping with respect to therapeutic classes Sun Pharma. Abbott. Intas. Alkem. Torrent and GSK Pharma. Micro Labs Cadila. FDC. Glenmark. Piramal. Aristo. Macleods. Torrent. We have plotted the dominance of each player in these respective segments using prescription market share as the key measure of dominance. exclude companies with unfavorable non-domestic business  Screen #3 . Micro Labs IPCA Labs. Ranbaxy Panacea. Cadila. AstraZeneca. Unichem. Sun Pharma. GSK Pharma High Dominance Medium Eli Lilly. Intas. Piramal. Lupin Aventis. Dr Reddy's. Torrent. Emcure. Mankind. Lupin Low Pfizer. based on nine key success factors for picking domestic formulation stocks The final list from both the approaches is . Given the fragmented nature of the Indian formulations market.Of the above. Lupin. Lupin. Biocon Others Source: MOSL CVS Diabetes Anti-infectives CNS Companies in bold have been covered in this report August 2011 18 . Lupin Sun Pharma. Lupin Aventis. Piramal Alembic.Identify companies with dominating presence in high-potential ailment segments  Screen #2 . we have defined 5% as the minimum threshold market share which qualifies as high dominance while market share of between 3-5% qualifies as medium category.

The chart below depicts the matrix of these two businesses: Company mapping relative to the attractiveness of domestic and international business Favourable International Business Dr Reddy Sun Pharma. Cadila and Aventis also reasonably well placed These companies are also relatively well placed in the Indian formulations market and form the 2nd-tier of companies which should be focused on as participants in this large opportunity. Abbott. Torrent Pharma Ranbaxy. Cadila. Reddy's & Glenmark need to further strengthen their positioning The chart above indicates that DRL and Glenmark have a lot of catching-up to do to qualify as companies which will be able to exploit the large opportunity in the domestic formulations business. Cipla. Brand-building ability of these companies Ranbaxy.Domestic Formulations | New Peaks Sun. Lupin and Torrent. view on non-domestic business is also important It is well-known that most Indian pharmaceutical companies are not pure-plays on the domestic opportunity given their strong focus on international generic businesses. GSK best placed to capture the opportunity We note that these companies are best placed to capture the incremental opportunity in the high-growth life-style and anti-infectives segments by virtue of: 1. Strong presence in these key segments 2. Cipla. These companies suffer from relatively lower prescription market share in the high growth therapeutic segments. GSK Pharma 3 of our 4 top picks are favorably placed in both their domestic and international businesses Neutral Glenmark Pharma Unfavourable Note: Only companies covered in this report have been mapped Unfavourable Neutral Domestic Business Favourable Source: MOSL Screen #3 Earnings growth v/s Valuation Juxtapose the Screen #2 shortlisted companies vis-à-vis earnings growth and valuation We plotted the Screen #2 shortlisted companies in a matrix of FY11-13E EPS CAGR and FY11 P/E as depicted below. Lupin. Lupin. Dr. 19 August 2011 . it becomes imperative to map the domestic and the non-domestic businesses of these companies to take an overall view on these companies. Screen #2 Non-domestic business Most Indian companies are not pure-plays. High prescription market share of at least 5% 3. Hence. the top picks are Cipla. Based on the same.

Reddy's Labs Glenmark Ranbaxy ** GSK Pharma score 7 6 4 5 6 6 4 2 6 pro-rated 9 8 6 9 9 7 8 6 6 7 9 7 3 6 9 6 6 6 8 5 7 6 5 6 3 7 7 5 6 5 6 6 4 6 2 3 5 6 6 5 5 7 5 6 3 as rating for Non-domestic business is not 7 9 5 7 6 6 6 6 8 6 6 7 5 3 9 5 3 applicable 13 77 14 66 14 64 14 62 14 61 12 60 12 52 10 49 9 49 Source: MOSL 4 buys: Cipla.Domestic Formulations | New Peaks Earnings growth v/s Valuation: Cipla.0 22. combining both Approaches 1 and 2. Our MEDICINES Scorecard is given below. 40 FY11 P/E (x) Ranbaxy (53%. Lupin on top . RoCE (%) Very high due to -ve capital employed GSK 30 Dr Reddy 20 Cadila Lupin Cipla Sun 25 22 7 16 DRL 13 Cadila GSK Ranbaxy Lupin 28 23 47 27 26 14 15 Glenmark S Glenmark 22 16 17 Cipla 19 25 Torrent 10 10..Adj..RoCE adjusted for other income in P&L and Cash in Balance sheet RoCE and Adj.0 18. RoCE are average of FY11-13 Source: MOSL Approach 2: The MEDICINES score We have identified nine key success factors (KSFs) for shortlisting Indian pharma companies and their stocks. We have rated the companies on these KSFs to arrive at a final "MEDICINES Score" out of a maximum possible 100.0 FY11-13E EPS CAGR (%) 26. our top picks are Cipla. GSK Pharma 4 of the top 5 MEDICINES score companies correspond with Approach 1. Torrent and GSK Pharma. RoCE . GSK merits rich valuation due to superior return ratios RoCE (%) Adj. MEDICINES Measures M E D I C I N E S Mix & Market share Equity with doctors Distribution & reach Introductions CAGR & scale-up Improvement in MR productivity Non-domestic business Earnings growth Stock attractiveness Indian domestic pharma players: The MEDICINES scorecard M E D I C I N E Total 4 of the top 5 MEDICINES score companies correspond with Approach 1. 65x)  . August 2011 Torrent 20 . The companies with the highest MEDICINES Score are the most attractive investment ideas. We have considered the following KSFs for evaluating the domestic formulations business (see box on page 21 for explanation).0 Sun 14. Lupin. Lupin.. Torrent.0 Note . Torrent. We are Neutral on Sun Pharma only due to rich valuations. Thus.. These success factors correspond to the initials of the word "MEDICINES".0 30. We are Neutral on Sun only due to rich valuations Sun Cipla GSK Pharma ** Lupin Torrent Pharma Cadila Dr.

August 2011 21 . I . productivity of sales force. Companies with consistently high or improving sales force productivity are rated higher.Earnings growth Maximum score: 10 This measures the distribution strength of a company in terms of its presence in metros. M . N . Companies with consistent high growth are rated higher.Criteria & rating methodology We briefly explain below the KSFs and the rating criteria. return ratios.Stock Attractiveness Maximum score: 20 Introductions measures the ability of a company to drive sales from new launches in the Indian formulations market (since this is an important growth contributor for most Indian companies). E . E . and rural areas.CAGR and scale-up Maximum score: 10 Mix & Market share indicates the therapeutic mix for the company in the domestic formulations market. etc. Companies with higher contribution from new launches are rated higher. Companies with favorable outlook are rated higher.Domestic Formulations | New Peaks MEDICINES Score . and captures our view on the stock including issues such as depth of management. Stock attractiveness has a higher weight of 20 compared to others. Companies with high longterm earnings growth (FY05-13) are rated higher. Tier-I cities.Introductions Maximum score: 10 We have considered overall earnings growth. and valuations. Diabetes & CNS) and Anti-infectives as the most attractive segments for driving future growth and profitability.Non-domestic business Maximum score: 10 This captures our view on the other businesses of the company including one-off option values. and not just from the domestic business. Companies expected to do well in these businesses are rated higher.Mix & Market share Maximum score: 10 C . score: 10 Equity with doctors implies the brand equity which the company enjoys with doctors. D .Distribution & reach Maximum score: 10 MR (medical representative) productivity captures the ability of a company to drive growth in its domestic formulations portfolio through improvement in productivity of the sales force (measured as Sales/MR). towns. S . corporate governance.Improvement in MR productivity Max.Equity with doctors Maximum score: 10 CAGR & scale-up captures the past and future growth in the domestic formulations portfolio driven by various factors like therapeutic mix. We have used prescription market share and prescription rankings as the proxy to measure brand equity with doctors. We have identified life-style segments (CVS. brand equity. Companies with wider distribution reach in relevant geographies are rated higher. Companies with higher prescription share and better prescription rankings are rated higher. I . new launches. Companies with strong presence in these segments will be rated higher.

7 27.1 18.1 16.4 24.5 16.0 11.9 68.1 10.165 6 Dr.6 13.7 FY11 23.8 17.078 5 Glenmark 66 4.7 47.4 11.3 29.7 17.7 11.9 65.6 5 Torrent Pharma 1. Reddy's Labs & Ranbaxy core valuations adjusted for DCF value of Para-IV upsides 22 . Reddy's 3.8 26.5 FY11 14.600 6 Torrent Pharma 73 2.500 7 GSK Pharma ** 60 65 4.7 27. Gynaec and 2nd in CVS.7 27.500 7 Ranbaxy In last 4 years 124 304 266 151 21 197 89 105 255 Introductions Contbn to growth (%) 56 45 69 49 15 37 31 52 50 CAGR & Scale-up (%) .1 11.4 17.3 3 GSK Pharma ** 6.5 12.4 19. Reddy's ## .2 16.4 34.6 21.Domestic Formulations | New Peaks Detailed MEDICINES Score MEDICINES Score 77 66 62 61 64 60 52 49 49 Mix Chronic therapy contribution (%) 61 42 43 62 5 31 28 24 21 Equity with doctors Score 7 6 5 6 4 6 4 2 6 Comment Leader in CNS.2 P/E (X) FY12E FY13E 21.1 3.4 ROE (%) FY12E FY13E 14.2 30.8 4.6 5 Dr.7 33.6 3.5 27. Anti-diabetics Market leader in AI and Respiratory Leader in Anti-TB segment Ranks 2nd in CNS and 7th in CVS Market leader in Derma.5 12.Adjusted for Rs77/sh of August 2011 13 10 15 -3 -12 FY11 12.6 3 Non domestic business Favorability Score High 7 Medium 5 High 6 High 6 Not applicable N.5 17.5 16.3 17.8 29.0 17.5 15.7 19.5 25. High 6 High 7 Low 3 Medium 5 Earnings Growth (FY11-13) Comment (%) Score 22 9 21 7 13 6 22 8 16 6 21 6 12 5 24 9 55 3 Stock attractiveness Comment Score Neutral 13 Top pick 14 Top pick 14 Top pick 14 Buy 14 Neutral 12 Neutral 12 Neutral 10 Sell 9 ** GSK Pharma total MEDICINES score pro-rated as rating for Non-domestic business is not applicable Domestic formulations companies .2 20.1 77.1 10.6 3.0 20.3 18.8 9 Cipla 4.3 31.6 23.9 41.0 17.4 15.9 16.3 40.4 27.600 8 Sun 63 5.6 20.4 31. Reddy's 70 2.5 2.6 89.Comparative valuations (INR) Company Target Upside (CMP) Price (%) Top Picks Cipla (281) 361 28 Lupin (450) 514 14 Torrent (589) 762 29 GSK (2.1 17.4 25.682 6 Lupin 3.1 13.6 16.Sales Score 6 6 6 5 3 5 4 6 5 FY05-11 23 14 22 19 8 12 18 19 10 FY11-13 18 13 19 18 14 15 16 17 16 Score 9 6 8 6 6 6 6 6 6 Improvement in productivity (Sales/MR.155) 2.5 17.9 22.0 12.3 31.670 Glenmark (318) 310 Ranbaxy ## (468) 412 * Dr.0 17.0 14.1 3.2 17.6 3.1 20.9 7 Lupin 3.8 EPS (INR) FY12E FY13E 13.6 20. INR m) 2004 2010 Score Sun 3.6 5 Ranbaxy 4.1 29.6 12.2 14.2 20.1 14.5 7.4 19.2 7.7 16.4 23.1 23.5 17.1 9 Cadila 4.2 37. Reddy's Glenmark Ranbaxy Distribution & reach Metro/Tier I MR strength Score (% of sales) 73 2. Dr.446) 1.8 8.A.5 24.7 33.3 23.5 29.2 16. Vit and Pain Mgmt Among top 3 players in CVS and GI Ranks 3rd in GI and Pain Mgmt Ranks 2nd in Dermatology Among the leaders in AI and Dermatology Score 9 7 6 7 9 7 6 3 5 Sun Cipla Lupin Torrent Pharma GSK Pharma ** Cadila Dr.100 8 Cipla 70 3.1 22.500 7 Cadila 68 3.6 25.1 19.4 21.330 8 Others Sun (464) 524 Cadila (824) 907 DRRD* (1.4 22.0 19.1 17.7 14.6 30.3 EV/EBITDA (X) FY11 FY12E FY13E 17.3 28.4 DCF value of FTF.2 2 Glenmark 3.3 68.2 26.1 81.4 18.3 22.8 9.6 25.

Domestic Formulations | New Peaks Ailment Profiles Ailments Infection CVS Disease Diabetes CNS Diseases Pain Gastro-intestinal (GI) Problems Respiratory Diseases August 2011 23 .

5.4%) Segment Size (INR B) 20 19 18 29 28 47 Contribution to Industry (%) 80 70 61 18 17 Key Brands Augmentin . often resulting in disease.7 Anti-infective segment-prescription market share (%) .7 GSK. Antibiotics work by slowing down the multiplication of bacteria or killing the bacteria. Antibiotics only work for bacteria and do not affect viruses. and antifungal. Mammalian hosts react to infections with an innate response.Alkem. 7.FDC. antitubercular.GSK. 5. Pharmaceuticals can also help fight infections.0 Source: Industry/MOSL Others. often involving inflammation. Cephalosporins.8 FDC. bacteria.2010 Cipla.8 Others. Quinolones. 32. 44. though larger organisms like macroparasites and fungi can also infect.0 Alembic. 7. 5. Colloquially. 4. Zifi . Key Drugs Penicillins. Macrolides.Prescription Rankings Company Cipla Mankind Ranbaxy FDC Piramal (Abbott) Macleods Unbranded Alkem Alembic GSK Jan-07 1 5 2 3 7 10 6 8 4 9 Jan-08 1 4 2 3 7 10 6 8 5 9 Jan-09 1 4 3 2 5 10 7 8 6 9 Jan-10 1 3 2 4 5 9 7 8 6 10 Oct-10 1 2 3 4 5 6 7 8 9 10 17 2000 2001 2005 2008 2009 2010 Anti-infective segment .Value market share (%) .1 Piramal (Abbott). Mox .4 Mankind. Taxim . 10.3 Ranbaxy. 6 Piramal (Abbott). 10.Domestic Formulations | New Peaks Ailment & Therapy profile Infection Ailment snapshot An infection is the colonization of a host organism by a parasite species. injection or may be applied topically. 7. 2. Four types of anti-infective or drugs exist: antibacterial (antibiotic).3 Macleods. and viroids. 8.4 Macleods.8 Alkem. Infecting parasites seek to use the host's resources to reproduce. 8.8 Alembic. the antibiotic may be given by mouth. 5. multiple antibiotics are used to decrease the risk of resistance and increase efficacy. Hosts normally fight infections themselves via their immune system.6 Cipla.9 August 2011 24 . 4. 5 FDC. Severe infections of the brain are usually treated with intravenous antibiotics.5 Aristo. followed by an adaptive response. prions. 4.Alembic Anti-infectives Segment . 2. Sometimes. 4.2010 Ranbaxy. infections are usually considered to be caused by microscopic organisms or microparasites like viruses.1 Mankind. Aminoglycosides.8 GSK. Depending on the severity and the type of infection. Tetracyclines Anti-infectives Segment (2001-10 CAGR . antiviral. 6.12.5 Alkem. Anti-infectives Therapy snapshot Anti-infective drugs are used to suppress/cure the infection.5 Aristo.Ranbaxy Azithral .

Domestic Formulations | New Peaks
Ailment & Therapy profile

CVS Disease
Ailment snapshot
Cardiovascular disease are the class of diseases that involve the heart or blood vessels (arteries and veins).While the term technically refers to any disease that affects the cardiovascular system, it is usually used to refer to those related to atherosclerosis (arterial disease). These conditions usually have similar causes, mechanisms, and treatments. In practice, cardiovascular disease is treated by cardiologists, thoracic surgeons, vascular surgeons, neurologists, and interventional radiologists, depending on the organ system that is being treated.

CVS Drugs
Therapy snapshot
Cardiovascular medications are used as a means to control or to prevent certain forms of heart disease. Many people with advanced heart disease may take several of these drugs. Types of cardiovascular drugs may be broken into groups depending upon their action or what they treat. Categories that might describe drug actions include the following: statins (for cholesterol), diuretics (for blood pressure), anticoagulants (for blood thinning), anti-platelet (for removing bold clots), beta-blockers (for preserving normal heart rhythm after a heart attack and for lowering high blood pressure), digitalis drugs (for cardiac failure), vasodilators (for facilitating blood supply to the heart), calcium channel blockers (for angina & high blood pressure) and ACE inhibitors (for high blood pressure).

Key Drugs
Angiotensin II Receptor Blockers, Angiotensin-Converting Enzyme (ACE) Inhibitors, Antiarrhythmics, Antiplatelet
CVS Segment (2001-10 CAGR - 15.9%)
Segment Size (INR B) 10 9 9 11 11 Contribution to Industry (%) 11

Key Brands
Storvas - Ranbaxy, Cardace - Sanofi, Aten - Cadila, LosarH - Unichem, Minipress-XL - Pfizer
CVS Segment - Prescription Rankings
Company USV Sun Piramal (Abbott) Cipla Lupin Torrent Zydus-Cadila Sanofi Unichem Micro Labs Jan-07 1 2 4 5 9 8 3 7 6 11 Jan-08 1 2 4 5 7 8 3 6 9 10 Jan-09 1 2 3 4 7 6 5 9 8 10 Jan-10 1 2 3 4 6 5 7 9 8 11 Oct-10 1 2 3 4 5 6 7 8 9 10

38 24 13 2000 14 2001 2005 2008

45

53

2009

2010

CVS Segment - Value market share (%) - 2010
Sun, 7.1 Others, 41.1

CVS Segment - Prescription market share (%) - 2010
USV, 9.3

Torrent, 6.8 ZydusCadila, 6.5 Unichem, 6.2 Cipla, 5.9 Ranbaxy, 5.8 Lupin, 5.6 USV, 5.1

Sun, 6.8 Piramal (Abbott), 5.3 Others, 48.2 Cipla, 5.1 Lupin, 5.0 Torrent, 4.6 ZydusCadila, 4.5 Sanofi, 4.0
Source: Industry/MOSL

Emcure, 4.8 Sanofi, 5.1

Micro Labs, 3.3

Unichem, 4.0

August 2011

25

Domestic Formulations | New Peaks
Ailment & Therapy profile

Diabetes
Ailment snapshot
Diabetes mellitus, often simply referred to as diabetes, is a group of metabolic diseases in which a person has high blood sugar, either because the body does not produce enough insulin, or because cells do not respond to the insulin that is produced. There are three main types of diabetes: Type 1 diabetes: results from the body's failure to produce insulin, and presently requires the person to inject insulin. Type 2 diabetes: results from insulin resistance, a condition in which cells fail to use insulin properly, sometimes combined with an absolute insulin deficiency. Gestational diabetes: is when pregnant women, who have never had diabetes before, have a high blood glucose level during pregnancy. It may precede development of type 2 diabetes.

Anti-diabetic
Therapy snapshot
Anti-diabetic medications treat diabetes mellitus by lowering glucose levels in the blood. With the exceptions of insulin, exenatide, and pramlintide, all are administered orally. There are different classes of anti-diabetic drugs, and their selection depends on the nature of the diabetes, age and situation of the person, as well as other factors. Type 1 diabetes can only be controlled with the help of injected insulin. Type 2 diabetes treatments include (1) agents which increase the amount of insulin secreted by the pancreas (Secretagogues), (2) agents which increase the sensitivity of target organs to insulin (Insulin sensitizers), and (3) agents which decrease the rate at which glucose is absorbed from the gastrointestinal tract (Alpha-glucosidase inhibitors).

Key Drugs
Insulin, Alpha-glucosidase inhibitors, Glimepiride, Insulin sensitizers, Secretagogues
Diabetes Segment (2001-10 CAGR - 17.8%)
Segment Size (INR B) Contribution to Industry (%) 5.3 4.0 3.3 27 18 5 2000 6 2001 10 22 4.3 5.4 5.8

Key Brands
Human Mixtrad - Novo, Lantus - Sanofi, Glycomet GP USV, Novomix - Novo, Amaryl - Sanofi
Diabetes Segment - Prescription Rankings
Company USV Sun Abbott Sanofi Micro Labs Lupin Franco Piramal (Abbott) Eris Glenmark Jan-07 1 2 3 4 5 8 7 6 NA 9 Jan-08 1 2 3 4 7 8 6 5 NA 9 Jan-09 1 2 3 6 7 8 5 4 NA 9 Jan-10 1 2 3 4 6 8 7 5 12 10 Oct-10 1 2 3 4 5 6 7 8 9 10

2005

2008

2009

2010

Diabetes Segment - Value market share (%) - 2010
Others, 29.6 Abbott, 20

Diabetes Segment - Prescription market share (%) - 2010
USV, 14.2 Sun, 7.8 Others, 40.9

USV, 12.4 Franco, 2.7 Wockhardt, 3.2 MSD, 3.2 Lupin, 3.8 Micro Labs, Piramal (Abbott), 4 4.2 Sanofi, 9.1 Sun, 7.8 Glenmark, 2.9 Eris, 3.3

Abbott, 6.6 Sanofi, 5.2 Micro Labs, 5.2 Lupin, 4.9 Piramal (Abbott), 4.5 Franco, 4.6

Source: Industry/MOSL

August 2011

26

Domestic Formulations | New Peaks
Ailment & Therapy profile

CNS Diseases
Ailment snapshot
A central nervous system disease can affect either the spinal cord (myelopathy) or brain (encephalopathy), both part of the central nervous system. The central nervous system controls behaviors in the human body, so this can be a fatal illness. Common CNS diseases include Encephalitis, Meningitis, Alzheimer's disease, Parkinson's disease, Multiple sclerosis and depression.

CNS Drugs
Therapy snapshot
The key central nervous system drugs obtainable in the market are antidepressant, ergot derivative, sedative, antipsychotic, benzodiazepine and antiemtic. Out of the whole central nervous system drugs market; antidepressants, antipsychotics and anti epileptics are the largest growing segments.

Key Drugs
Phenytoin sodium, Mecobalamin, Gabapentin, Citalopram, Alprazolam.
CNS Segment (2001-10 CAGR - 14.4%)
Segment Size (INR B) Contribution to Industry (%) 5 6

Key Brands
Eptoin - Abbott, Nurokind Plus - Mankind, Vertin - Solvay Alprax - Torrent, Trika - Unichem
CNS Segment - Prescription Rankings
Company Sun Intas Torrent Piramal (Abbott) UCB Micro Labs Local companies Unichem Abbott Wockhardt Jan-07 1 3 2 5 6 7 NA 4 9 10 Jan-08 1 3 2 4 6 7 NA 5 9 10 Jan-09 1 3 2 4 5 7 12 6 9 10 Jan-10 1 2 3 4 5 6 8 7 9 11 Oct-10 1 2 3 4 5 6 7 8 9 10

5 4 3 4

27 18 5 2000 6 2001 10 22

2005

2008

2009

2010

CNS Segment - Value market share (%) - 2010
Others, 24.2 Sun, 20.7

CNS Segment - Prescription market share (%) - 2010
Sun, 12.1 Intas, 8.2 Others, 43.7 Torrent, 8.1

Micro Labs, 3.5 Ranbaxy, 3.8 Unichem, 3.9 Pfizer, 4.2 Sanofi, 4.8

Intas, 12.2
Piramal (Abbott), 5.5

Torrent, 8.6 Piramal (Abbott), 6.5
Cipla, 2.9

UCB, 5.0 Micro Labs, 4.2

Abbott, 7.6

Wockhardt, 3.1

Abbott, 3.5

Unichem, 3.8

Source: Industry/MOSL

August 2011

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63. 3.3 9.7 ZydusCadila. Fenamates. 5. Cox-2 Inhibitors.0 8.0 9.Prescription Rankings Company GSK Generic-generics Dr.8 Others. is not a disease.4 Alkem.GSK. 4 August 2011 28 . Sulphonanilides Pain/NSAIDS Segment (2001-10 CAGR . 2.0 Others. 7 Dr.11. 3.2 Ranbaxy. Calpol .5 Novartis.2%) Segment Size (INR B) 10.6 Contribution to Industry (%) Key Brands Voveran .1 Micro Labs. Combiflam . and pain that resolves quickly is called acute. 5.Novartis. 4. Sulphonanilides. but some painful conditions. lasting only until the noxious stimulus is removed or the underlying damage or pathology has healed. Pain/NSAIDS Drugs Therapy snapshot The key pain management drugs obtainable in the market are aSalicylates (like Aspirin).9 Cipla. Propionic acid derivatives.1 Sanofi. Cox-2 Inhibitors. 6.Domestic Formulations | New Peaks Ailment & Therapy profile Pain Ailment snapshot Pain.Value market share (%) .7 Piramal (Abbott). It is a major symptom in many medical conditions.Ranbaxy Pain/NSAIDS Segment . Acetic acid derivatives.4 Ipca. 7 GSK. is much more difficult and may require the coordinated efforts of doctors. Pain is usually transitory.5 Sanofi.2 Alkem. 7. 2. by itself. Reddy's. Reddy's.3 Dr. 3. physiotherapists along with medicines. 47. Naproxen). 3. Fenamates. 3. Propionic acid derivatives (like Ibuprofen. but is an indicator of temporary or long-lasting damage to the human body. Key Drugs Salicylates. cancer and idiopathic pain. Oxicam derivatives. may persist for years. Oxicam derivatives. 4.2010 Novartis. 4. Acetic acid derivatives (like Diclofenac).Prescription market share (%) . Volini . Acute pain is usually managed with medications while management of chronic pain. 4 Pain/NSAIDS Segment . 3.Sanofi. Pain that lasts a long time is called chronic.7 8.5 Piramal (Abbott). Reddy's Micro Labs Local Companies Cipla Ipca Mankind Alkem Sanofi Jan-07 1 2 3 9 NA 4 11 15 7 6 Jan-08 1 2 3 9 NA 5 11 12 8 4 Jan-09 2 1 3 8 11 5 12 9 10 4 Jan-10 2 1 3 7 4 5 10 6 12 9 Oct-10 1 2 3 4 5 6 7 8 9 10 14 2000 16 2001 21 2005 30 2008 35 2009 40 2010 Pain/NSAIDS Segment .2010 GSK.3 Mankind. such as rheumatoid arthritis.6 Ipca. Spamo-Proxyvon Wockhardt. 3.7 8.7 Source: Industry/MOSL Elder. peripheral neuropathy.

Reddy's. Anti-spasmodics. Antiulcerants. 2.Pfizer GI Segment .2010 Abbott. Purgatives.6 August 2011 29 . Cholera. GI Drugs Therapy snapshot The key GI drugs obtainable in the market are Antacids. 6. 60.GSK.9 Source: Industry/MOSL Others. 4.1 Key Brands Zinetac . Digene .5 Dr.8 10.6 Piramal (Abbott). Reddy's. 2.8 GI Segment . Reddy's JB Chem Torrent Local Companies Piramal (Abbott) Alkem Generic-generics Jan-07 2 1 5 3 7 NA 6 13 9 Jan-08 1 2 3 4 6 NA 5 11 8 Jan-09 1 2 4 3 5 14 6 10 7 Jan-10 1 2 4 3 6 5 7 9 8 Oct-10 1 2 3 5 6 7 8 9 10 17 2000 12 2001 24 2005 37 2008 43 2009 51 2010 GI Segment . 3.1%) Segment Size (INR B) 11.2 JB Chem. 6.5 Dr. Laxatives. Gastroesophageal reflux disease (GERD).6 Ranbaxy. Gastroenteritis.9 11. other more serious diseases include Cancer.1 Torrent.Domestic Formulations | New Peaks Ailment & Therapy profile Gastro-intestinal (GI) Problems Ailment snapshot Diseases/problems related to the GI tract mainly affect the stomach and the intestines in humans. 4. Antiulcerants.6 Alkem.2 ZydusCadila. etc.0 10. 5.7 FDC.3 8. Digestives. 5.2 Sun.9 Cadila Pharma. 3. 3. 3. Anti-reflux agents. Colorectal cancer. Aciloc Cadila. 5. Anti-inflammatories. 3.2010 Mankind. Anti-emetics Key Drugs Antacids.DRL.0 Torrent.. 4. 4.Prescription Rankings Company Mankind Cadila Dr. 7. Pancreatitis. Anti-spasmodics.Value market share (%) . 4.7 Aristo. 49.Prescription market share (%) .5 Alkem. Laxatives. Peptic ulcer disease. etc. GIT regulators Antiflatulents.6 Piramal (Abbott).4 ZydusCadila. Anti-reflux agents. While the most common problems are acidity/ulcers. Inflammatory bowel disease.6 Contribution to Industry (%) 10. Irritable bowel syndrome. 4.4 Sun. 3.3 Mankind. many of these problems are chronic in nature and generally require longterm treatments by way of medicines and gastroenterologists consultations. Omez . diet alterations.9 Others.Abbott. Purgatives GI Segment (2001-10 CAGR . Antiflatulents. Gelusil MPS .17. While some of these problems are temporary in nature and can be cured by medicines. GIT regulators.

Corticosteroids.8 Wockhardt.4 GSK.2010 Cipla. 63. Corticosteroids.0 9.8 Contribution to Industry (%) Key Brands Corex . Respiratory diseases range from mild and self-limiting such as the common cold to chronic diseases like asthma/ COPD and life-threatening such as bacterial pneumonia or pulmonary embolism. 33.11. upper respiratory tract and of the nerves and muscles of breathing. 3.Domestic Formulations | New Peaks Ailment & Therapy profile Respiratory Diseases Ailment snapshot Respiratory disease is the term for diseases of the respiratory system.4 8. 3.8 ZydusCadila.0 Indoco. 3. Bronchodilators. 3.1 ZydusCadila. 5. 2. They are a common and important cause of illness and death.9 Sanofi.8 Source: Industry/MOSL August 2011 30 . Asthalin Cipla. 4.5 Dr. Key Drugs Common cough & cold medicines. Bronchodilators.8 8. These include diseases of the lung.0 10.Cipla. 6. Phensedyl .7 Piramal (Abbott).0 Sanofi.9 Alembic. bronchial tubes. 2.9 GSK.4 Lupin. 2.4%) Segment Size (INR B) 10. 5. Seroflo .2 Mankind. pleural cavity.3 Piramal (Abbott).2010 Cipla. 9.Pfizer.Value market share (%) . 4. Respiratory Drugs Therapy snapshot The key Respiratory Drugs obtainable in the market are Common cough & cold medicines. 3.9 8.Cipla Respiratory Segment . Aerocort .6 Pfizer.Prescription market share (%) .8 Alembic. 4.7 Glenmark.1 Others. 2. 2. 2.Piramal (Abbott). Mechanical ventilation. Mechanical ventilation Respiratory Segment (2001-10 CAGR . 22. 7.1 Others. Reddy's.4 Respiratory Segment .6 Centaur Labs.Prescription Rankings Company Cipla Generic-generics Zydus-Cadila GSK Mankind Local Companies Centaur Labs Indoco Sanofi Alembic Jan-07 1 4 3 2 22 NA 7 8 9 6 Jan-08 1 4 3 2 22 NA 7 8 10 6 Jan-09 1 4 2 3 12 10 6 7 9 8 Jan-10 1 4 2 3 6 5 7 8 11 10 Oct-10 1 2 3 4 5 6 7 8 9 10 15 2000 16 2001 22 2005 30 2008 36 2009 41 2010 Respiratory Segment . trachea.

Currently. MNCs have started focusing on Indian operations. Due to strong chemistry skills. the scenario changed dramatically in the last 4 decades. During the same period. The presence of small and regional players has increased significantly over the years. many multinational companies exited the country while many others followed cautious approach in terms of new product launches. Due to intensified competition. Market share of MNCS in Emerging markets (%) MNCs 21 23 Local 36 74 78 79 77 64 26 22 India Source: McKinsey/MOSL Poland Russia Brazil China August 2011 31 . Many MNCs have shown interest in expanding their presence in India through organic and inorganic growth means. in the coming years. local companies have managed to garner ~80% market share in India. prices of the drugs in India are one of the lowest in the world.Domestic Formulations | New Peaks Annexure 1: Evolution of the market and state of the industry Till 1970. We believe that. strong brand equity among physicians. in the absence of product patent. with the introduction of process patent law in 1970. However. strong financial muscles and increased focus of large MNCs on emerging markets as a next growth driver in light of dwindling revenues in developed countries. MNCs will see their market share increasing gradually on led by Patented product pipeline of parent. with the introduction of new product patent law in 2005 as per WTO commitment. However. Dominance of local companies Domestic pharmaceutical companies are dominant in India. multinational pharmaceutical companies dominated the domestic market and enjoyed 80% market share. the market is a fragmented market with the largest player holding 7% market share. due to product patent regime. Today the domestic market is dominated by Indian companies with market share of ~80%.

In Brazil and Russia. prices are lower than those in neighbouring countries such as Sri Lanka. The share of branded generics is in India is higher that some of the other emerging markets. Pakistan and Bangladesh. domestic players have opportunity to develop new combination and formulation of the products that are already in the market. going forward the markets will be dominated by branded generic segment while patented products will contribute 10% to the market demand in 2015. prices are likely to stabilize at current levels if not improve. trade power lies with the physicians. We believe that.Domestic Formulations | New Peaks Branded generic nature of the industry Indian pharmaceutical market is largely a branded generic market where the same molecule is sold by number of companies under different brand name. Also it is likely that a proportion of post 1995 molecules will not get full patent protection due to relatively narrow definition of patentability in the India patent act. Here. Nearly 80% of the Indian retail market is made up of branded generics while rest is distributed between OTC and generic drugs. (The total no of such products is more than 200). Prices of drugs in India are at around 10-12% of US prices and for some products. Due to the branded generic nature of the business. On an average there are 50 brands for any major molecule. branded generics account for 60% and 40% of the market. Low pricing levels Prices of medicines in India are one of the lowest in the world. the relationship and brand equity of the pharmaceutical companies with physicians is a key determinant of success. August 2011 32 . The level of specialization of molecule is important driver of pricing premium. Further. Indian companies have large options for launch of new generics from the basket of pre-1995 drugs. We believe that with the reduction in competition going forward on back of consolidation in the industry and shift toward specialty therapy segments. Severe competition has resulted in such low prices.

post-grant opposition provisions. The second amendment extended patent term to 20 years and shifted the burden of proof to the patent infringer. India is the only country in the world with such a system. Earlier. 2009). particle size. The first amendment introduced the mailbox system to grant exclusive marketing rights to post 1995 patent holders in other markets. In addition. polymorphs.Domestic Formulations | New Peaks Annexure 2: Regulatory framework of the Indian formulations industry Product patent regime begun from 2005 India adopted product patent regime in 2005. from patent protection unless they differ significantly in efficacy. India made two important amendments to the patent act. and point to there being no mechanism to dismiss even the most frivolous oppositions. the burden of proof in case of infringement was on the patent holder. thus effectively restricting patentability only to the NCEs Pre and Post grant opposition: Both pre and post-grant opposition have been introduced allowing oral hearing. Opposition can be filed any time from the date of publication of the patent to the date of grant. derivatives of know substances etc. isomers. This could result into several pre-grant oppositions being filed causing delay in patent granting process. The act defines the scope of patentability and pre-grant. metabolites. pure form. which helped to build the basis of a strong and competitive domestic pharmaceutical industry. Indian pharmaceutical industry had price control mechanism that helped to deliver medicines at affordable prices to patients in India. August 2011 33 . as per original Indian patent act 1970. combinations. esters. Pre-grant oppositions have proven to be a big impediment to patent issuance in India. Further. there is no mechanism for the applicant to respond and this is likely to be of significant concern to branded pharmaceutical companies. The act precludes salts. the new Indian patent act was introduced to grant product patents to pharmaceuticals. compulsory licensing and regulatory data protection Patentability: The patent act established product patent protection for the period of 20 years. In 2005. PhRMA reports than 200 pre-grant oppositions were pending as of early 2009 and most of these concerned pharmaceuticals (PhRMA. due to WTO commitments. patents were granted on the basis of process and not products. However. Multinational companies claim that domestic companies are using sequential filings to delay patents. This allows anyone to file opposition patents on any of 11 potential grounds for 6 months after a patent application is published but before the patent is granted.

may be more difficult to patent in India as the legal system is more likely to apply its discretion in the interpretation of the law and prevent those drugs from being patented. but provides a significant opportunity for domestic generics manufacturers. This could have a significant impact on the pharmaceutical companies' choice of products to be marketed in India. issues over ever-greening mean that some brands may not necessarily receive patent protection in India . Most recently.Domestic Formulations | New Peaks Compulsory licensing: Under Paragraph 6 of the DOHA Declaration on TRIPS and Public Health (from 2001). The Department of Industrial Policy and Promotion is considering developing new guidelines to enable the use of compulsory licensing beyond emergencies. have been most affected indicating for such drugs it may be more difficult to patent in India as the legal system is more likely to apply its discretion in the interpretation of the law and prevent those drugs from being patented. The patent holder will be entitled for compensation from licensee. CL will be available for export to developing countries such as in Africa which have insufficient or no manufacturing capacity in cases of national health emergencies. product in addition to process patents are recognized in India. This indicates that certain drug classes. since then several different product patent applications for other drugs have been refused. So far certain drug classes. This could threaten the companies in the long term. India rejected patent applications for Viread (tenofovir. Roche was the first company to have a patent granted in India under the new patent regime in February 2006. including cancer and HIV medication. from the perspective of the research-based drug industry. The issue is in active consideration. In August 2009. Regulatory data protection: Regulatory data protection is an integral part of IPR. India is permitted to use compulsory licenses under which the government forces a patent holder to grant use of a given product to the state. Lack of the provision will be a disincentive to R&D based companies and innovators. Since the Patent Amendment Act of 2005. including cancer and HIV medication. such as those that are viewed as expensive life-saving drugs. However. Despite improvements to the patent legislation. the Indian Patent Office rejected Roche's product patent for its new formulation of the cytomegalovirus infection treatment Calcite (valganciclovir).a frontline drug against human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/ AIDS) in developing countries.a move that is detrimental to branded players. Scope of compulsory licensing has been broadened to include affordability. particularly if licenses are used in situations other than emergencies. However. such as those that are viewed as expensive lifesaving drugs. Such patent rejections will undoubtedly lower confidence in the Indian market as such occurrences are no longer seen as isolated events. Gilead) . there are several problems with the IP environment in India. with some companies managing to emerge August 2011 34 . Thus Indian generics industry has benefited from compulsory licenses issued in other developing markets. it is not all bad news for pharmaceutical players. a patent for Pegasus (paginated interferon alpha-2a) was granted. However. Pharmaceuticals are fighting to enforce patent linkage in India and meanwhile a string of product patent rejections have reduced confidence in the Indian market. such as in view of anti-competition law and high drug prices. suggesting they could be used more liberally. non-working of patent etc.

the NPPA is responsible for fixing and revising the prices of certain controlled bulk drugs and formulations. a post tax return of 18% on net worth or a return of 26% of capital employed is allowed. making it the second antiretroviral therapy to attain exclusivity in India after Pfizer's Selzentry (maraviroc). For a bulk drug produced from the basic stage. In 1970. A revision introduced in 1979 established a price ceiling for certain controlled bulk drugs and formulations. The NPPA sanctions prices after reviewing detailed supporting calculations. The subsequent revisions to the legislation reduced the number of controlled drugs to 142 in 1987. Pricing of scheduled bulk drugs: Scheduled bulk drugs are allowed prices (excluding local taxes) that results in post tax return of 14% on net worth (share capital + free reserves . the maximum sale price is fixed at 2/3rd of the cutoff level or weighted average price. Sanctioned prices can not be revised without prior approval. Johnson & Johnson secured a key patent for its antiretroviral drug Intelence (etravirine). The APIs and formulations falling under the purview of the legislation are called scheduled drugs. or a 22% return on capital employed (fixed asset + working capital).value of investments not related to bulk drug business). The NPPA is responsible for setting and regulating the prices of bulk drugs and monitoring the availability of treatments in the market to identify shortages and take remedial steps. and is likely to have given the pharmaceutical industry in general some hope.Domestic Formulations | New Peaks from the patent system triumphant. In February 2008. a measure that affected 80% of the companies in the market. Two main criteria are used for identifying controlled drugs: the drug should be of a mass consumption nature and there should be an absence of sufficient competition for the drug. 74 bulk drugs and the formulation thereof are under the preview of price control. When there is one manufacturer of the bulk drug. 76 in 1995 and 74 in 1997. The body also maintains data on exports and imports as well as market shares and the profitability of individual companies. August 2011 35 . while also keeping a tab on the prices of drugs not in this list so that they are maintained at reasonable levels. This revision tried to regulate the retail prices by permitting a mark-up on ex-factory costs and around 370 drugs were implicated with direct price controls. Vis-à-vis a new plant an internal rate of return based on long term marginal costing is allowed. As per the Drugs Prices Control Order (DPCO) of 1997. depending upon the situation. NPPA regulates the prices of certain drugs/ formulations known as 'controlled bulk drugs'. and only when the approval is sanctions can players go ahead with the sale of the drug. and provides recommendation to the Ministry of Chemical and Fertilizers. Pricing: The DPCO fixes ceiling price for some of the APIs and formulations. Pricing regulations and role of NPPA National Pharmaceutical Pricing Authority (NPPA) is responsible for pricing decisions in India. the first DPCO was introduced. The NPPA is responsible for the collection of data and study of pricing structures of APIs and formulations. This body falls under the Ministry of Chemicals and Fertilizers and was established in 1997. This strengthened the company's position in the Indian market. bringing in direct controls on the profitability of pharmaceutical businesses: a maximum of 15% pre-tax profit alongside an indirect control on prices. Currently.

the new policy will have significant adverse impact on the domestic formulations players. Reportedly. Proposed new pharmaceutical policy The proposed pharmaceutical policy talks about bringing 354 essential drugs under the purview of the DPCO. Local taxes are added on at the wholesaler/retailers level and are not part of retail price as above. manufacturer's profit. Currently. The maximum margin that a distributor can take is 8% of the maximum retail price. it is difficult to comment on the implications of the proposed price control order before the final verdict is in place. The NPPA further ensures that manufacturers do not remove the price-controlled brands from the market so that essential medicines are still available for customers. this account for ~50% of the industry sales. In the case of decontrolled drugs. the margins earned by distributors and retailers are also regulated. the highest permitted margin is 16% for retailers. the margin set for distributors is 10%.Domestic Formulations | New Peaks Pricing of scheduled formulations manufactured in India: Scheduled formulations are based on the formula: RP = (MC+CC+PM+PC) x (1+MAPE/100) + ED RP: Retail Price MC: Material Cost CC: Conversion Cost PM: Packaging Material PC: Packaging Charges MAPE: Maximum Allowable Post Manufacturing Expenses ED: Excise Duty MAPE is intended to cover all the costs incurred by a manufacturer after packing . If implemented in the current form. August 2011 36 . a study noted that companies market products with pricecontrolled ingredients without getting the price fixed by the NPPA. However. The new policy is likely to allow MAPE of 150% with an additional 50% margin for the companies that invest sufficient on new drug research. dealer/retailer's profit etc. For instance. transport.that is. while for retailers it is 20%. Further. as the industry views this policy as regressive in nature. violations have been observed quite frequently. there is lot of pressure being built on the government by players and key pharmaceutical associations to revoke the new draft. In spite of these regulations. however. As per current order MAPE should not exceed 100%. even though theoretically they are required to obtain an official price from the NPPA every time the price of the controlled ingredient is revised.

Reddy's Labs  Glenmark August 2011 37 .Domestic Formulations | New Peaks Companies Companies Top buys  Cipla  Lupin  Torrent Pharma  GSK Pharma Others  Sun Pharma  Cadila  Ranbaxy  Dr.

671 10.8 3.2 P/E (X) 22.4 14.1 Background Cipla is a leading player in the domestic formulations market and has a presence across most therapeutic areas. Cipla's strategy for regulated markets (Europe and US) exports is built around supply tie-ups with global players.0 3. August 2011 38 .4 25. (%) M.7 11.193 79.057 63.100.0 13.Domestic Formulations | New Peaks MEDICINES CAPSULE Cipla CMP: INR281 TP: INR361 MEDICINES Score 66/100 CIPLA IN Improving asset utilization M: Mix 6/10 Buy 7/10 E: Equity with doctors Cipla offers a balanced play on chronic and acute therapeutic segments.3 21.177 12. It has leadership position in the respiratory segment.12 Rel.8 17. It launched 76 new products a year over the past four years. South Africa.8 EV/ EV/ Sales EBITDA 4.6 RoCE (%) 20. The ramp-up in domestic formulations revenue has been driven by existing products and new launches over the past four years.5 12.6 15.9 Financial & valuation summary Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS EPS (INR M) (INR M) (INR) GR. Cipla has strong brand equity in some of the largest therapeutic segments in the industry and ranks first in the respiratory segment.6 4.4 15. Perf.9 381/275 2/3/0 225. fourth in the anitinfective and fifth in the CVS segments.0 17.0 -3. Cipla derives 42% revenue from chronic therapeutic areas and has a dominant presence in large segments like anti-infective and CVS. It has one of the largest field force in the industry with an MR strength of 5. (%) 56. Australia.2 18.4 17. The company also has robust exports to several markets including Europe. US and the Middle East.8 16. Cipla is the market leader in the anti-infective and respiratory segments and it is among the leaders in the pain management and CVS segments.3 2.4 23.7 RoE (%) 17.6 3.0 2.4 16.1 P/BV (X) 3.4 3.6. (USD b) 802. D: Distribution & reach 8/10 I: Introductions 6/10 Cipla derives 63% of its revenue from metros and tier-I cities.760 13. (INR b) M. Distribution in metros and tier-I towns increased over time and Cipla is expanding its reach in tier-II to tier-VI towns.050 9.145 69.5 14.Cap.1 22.5 12. Cipla has been one of the most aggressive players in launching new products. Stock info Equity Shares (m) 52-Week Range (INR) 1.Cap. Based on prescription ranking.0 14.041 10.

Option values (approval for CFC-free inhalers and potential MNC contracts) can upgrade FY13 EPS. the founder's son. N: Non-domestic business 5/10 E: Earnings growth 7/10 We are positive on Cipla's international business. MR growth was 13.1x FY13E consolidated earnings. given its strong chemistry skills. Cipla is valued at 21. leading to EPS CAGR of 17%. which is lower than the industry average.7% over 2004-10 Revenue per MR has been stagnant at INR4. It was promoted by Dr K A Hamied and is currently managed by Dr Yusuf Hamied. Establishing a strong presence in India and emerging markets organically coupled with a low-risk conservative approach is his key achievement. Chairman C: CAGR and scale-up 6/10 I: Improvement in productivity 7/10 Cipla reported in line industry performance. Stock performance (1 year) Cipla 400 360 320 280 240 Aug-10 Sensex . We expect Cipla to post revenue CAGR of 12% over FY11-13. Cipla did not improve its MR productivity over 200410 as sales growth was in line with MR additions. We expect overall top-line CAGR of 12% over FY1113. S: Stock Attractiveness Cipla has one of the most conservative managements among Indian pharma companies. However. EPS growth is higher than top-line growth mainly due to our expectation of increased capacity utilization at Indore SEZ leading to better cost absorption. Rapid scale-up in revenue will be difficult given the high base and sizable presence in highly competitive and slow growing acute segments. even at this level. mainly due to a high base and intensifying competition in the anti-infection segment. productivity is above the industry average. Reiterate Buy with a target price of INR361 (22x FY13E EPS) excluding potential upsides. in certain key segments. We expect the international business to post 13% revenue CAGR over FY11-13 led by 14% CAGR for formulation exports. The company scaled up the business rapidly over the years and gained market share from competitors.4% and revenue growth was 13. posting revenue CAGR of 14% over FY05-11.Cipla Chairman Profile Barring the past two years.9m over 2004-10 years. large underutilized capacities and strong generic pipeline. Short-term performance may be muted until international regulatory authorities approve the new Indore SEZ.0x FY12E and 17. Cipla has been one of the most consistent performers amongst the Indian pharmaceutical companies. Return ratios are muted pending utilization of significant capex over the past 2-3 years.Rebased 14/20 Nov-10 Feb-11 May-11 Aug-11 August 2011 39 .

7% respectively. This business grew at 14% CAGR over the past six years. It posted revenue of 14% CAGR over the past six years in line with the industry's CAGR of 14%.1 13. AI. has a strong presence in therapeutic segments such as AI. which has grown from 5. In terms of the number of prescriptions written. CVS and gynecology segments. 56% DF EBITDA. gynecology dominate sales The top four therapeutic segments. Cipla: Therapeutic break-up Gynae cology 2% GI Pain FY01 3% Mgmt 6% The largest Indian player in the industry Before Abbott took over Piramal Healthcare's domestic formulations business. Cipla derives 58% of its revenue from acute therapies and the rest from chronic therapeutic areas.2 Good brand equity with physicians.1 16. CVS.9%.4% and 6. respiratory and CVS. In the AI. a leading company in the domestic formulations space.1% and 6.24% market share in the pharmaceuticals industry .4 5. though dependence on AI has fallen over the years. Although Cipla occupies second position in the pharmaceuticals industry.8 13. Cipla has outperformed market growth over the past four years and has consistently improved its market share. Cipla was the leader in the domestic formulations market for a few years.2 5. Cipla is the market leader in two of the largest therapy segments. AI. In most of these segments. Cipla ranks first in the respiratory segment and fourth in the AI segment with market shares of 22. 40 2006 2007 2008 2009 2010 August 2011 .5 5. Cipla holds 5. EBITDA Contribution Non-DF EBITDA. Equity with doctors: 7/10 Mkt Share (%) Grow th (%) 16. three of the largest therapeutic segments of the industry.3 5.3 19. Cipla has grown in line with market growth over the past two years. respiratory and CVS segments. contribute ~70% of Cipla's domestic formulation revenue.1% respectively and it ranks fourth and sixth in the CVS and pain management segments with a prescription market share of 5.44% Improving asset utilization Balanced play on chronic and acute therapeutic segments Cipla. Mix: 6/10 Respiratory.3 5.Cipla India formulations snapshot Domestic formulations the largest business segment for Cipla : The domestic formulations business is the leading revenue contributor to Cipla's top-line though the contribution has fallen from 75% in FY01 to 44% in FY11. Cipla's sizable presence in these segments makes it an attractive play in the domestic formulations business.1% and 3. respiratory and CVS segments Cipla has maintained or improved its market ranking but in the other therapeutic segments it has lost out on ranking. AI and respiratory segments. AI.05% in 2006. 1. strong positioning in respiratory. CVS segments Cipla has been a dominant player in the AI. Cipla offers a balanced play on lifestyle and acute therapeutic segments. Cipla ranks first in the AI and respiratory segments with a prescription market share of 8. with EBITDA contribution estimated at 44%. It ranks fifth in the CVS segment with market share of 5.4% respectively. the respiratory. it is the largest Indian company in the domestic formulations space. It is Cipla's most profitable segment. Market Share & growth CVS 15% Respira tory 29% Dermatol ogy 3% HIV 3% Ophthal mology 3% Pain 4% FY11 CNS 3% Others 8% Respirat ory 31% AI 45% GI 6% Gynaec 7% CVS 12% AI 20% Source: Company/Industry/MOSL 2.

0 16.7% CAGR over the past four years .3 60. has been better than that of industry average.2 9.2 9.7 12.9 15. in the respiratory segment) ranks fourteenth in the industry and reported growth of 11.2 22.4 24. Its No1 brand Asthalin (Salbulamol.3 11.2 18.7 8. All Cipla's top 10 brands feature among the top 300 brands of the industry.1 19.0 -4.9 18.9 18.Company Avg Gr .8 14.9 26.6 14. August 2011 41 . Cipla's revenue CAGR in rural and metro areas.268 836 761 654 878 818 503 439 423 YoY Gr (%) CAGR (%) Seroflo Salmeterol+Fluticasone Asthalin Salbutamol Aerocort Salbutamol+Beclomethasone Foracort Formoteral+Budesonide Mt pill Mifepriston Novamox Amoxycillin Ciplox Ciprofloxacin Duolin Salbutamol+Ipratropium Amlopres-at Atenolol+Amlodipine Budecort Budesonide CAGR through 2006-10 7.2 5. Distribution and reach: 8/10 Cipla derives 63% of its revenue from metros and class-I towns. Cipla's top 10 brands Brand Drug Product Launch 2000 1993 2008 2001 2002 1980 1989 2006 1996 1994 Sales (INR m) 925 1.4 14.0 8.3 15. Cipla's top four brands belong to the respiratory segment.7 18.4 AI CVS Respiratory Gynaecology Dermatology AI CVS Respiratory Gynaecology Dermatology Source: Industry/MOSL * Average growth over 2009-2010 Cipla's prescription ranking Jan-07 Anti-infectives Respiratory CVS Pain Mgmt CNS GI Derma Vit Gynaec 1 1 5 4 8 11 10 11 Jan-08 1 1 5 5 8 10 12 11 Jan-09 1 2 4 5 8 8 15 14 21 Jan-10 Oct-10 1 1 1 1 4 4 4 5 10 11 11 13 15 12 13 13 18 21 Source: Industry/MOSL Top 10 brands contribute 30% of revenue Cadila's top 10 brands contribute ~30% to total revenue.6 17.5 Source: Industry/MOSL 3.9 3.8 11. in line with the industry average. Over the past four years.Cipla Market share in key therapies (%) (2010) 22. indicating lower brand concentration.4 23.4 8.Industry 38.1 4.1 8.1 Growth comparison (%) (2010) Avg Gr .9 6.

Cipla launched 76 new products (including line extensions) annually and the average revenue per new launch almost doubled.6 19.7 54.6 14.8 32.3 18.0 32.2 18.6 32.7 27.2 CLASS I TOWNS 20.4 12.7 20.5 19.9 30. Introductions: 6/10 Among the most aggressive players in the industry in product launches.9 CY07 28.5 14.6 CY07 CY08 CY09 CY10 CY07 CY08 CY09 CY10 Source: Industry/MOSL 4.0 7.0 31.5 2.1 RURAL 18.5 30.6 32.5 20.7 17.6 11.0 20.0 3. Overall.6 14.9 19. suggesting better penetration of launched brands.0 28.5 13.9 22.2 23.8 CLASS II TO VI 19.2 53.2 12.9 7.7 17.3 20.6 CY06 28.8 131 CY07 157 CY08 205 CY09 147 CY10 5.0 Cipla: Growth composition (%) New Launches Existing Brands 85.9 30.9 9.4 RURAL 17.5 CLASS II TO VI 18.3 19.5 29.7 18.0 11.5 15.4 27. revenue growth was driven by existing products and new launches.0 17.5 -2.0 31.0 CY06 CY07 CY08 CY09 CY10 CY08 CY09 CY10 Cipla: Geography-wise growth rates (%) METROS CLASS II TO VI 21.1 8.5 17.6 29.8 32.0 17.9 29.6 30.4 13.2 16.3 Industry: Geographical distribution of revenues (%) METROS 20.0 9.3 CLASS I TOWNS RURAL 25.0 19.7 16.0 7.3 18.2 17.3 CY07 5.6 19.3 14.1 19. revenue-per-new-launch rises Over the past four years.6 CLASS I TOWNS 24. Of launches in last 2 yrs Avg sales per launch (INR m) 105.4 Industry: Geography-wise growth rates (%) METROS CLASS II TO VI CLASS I TOWNS RURAL 26.6 31.6 CY08 CY09 CY10 Source: Industry/MOSL August 2011 42 . Cipla: New launches No.1 7.6 20.Cipla Cipla: Geographical distribution of revenues (%) METROS 23.

Cipla: Domestic formulations performance DF Revenue (INR m) 17.7 16.Cipla 5.9m in FY10. its focus on enhancing workforce productivity must be enhanced.523 19.014 17. which is still above industry average. Cipla: Sales force productivity (2004-10) No. implying marginal productivity improvement of the salesforce. Cipla's domestic formulations business posted revenue CAGR of 13.178 30.0 13.113 28.783 22.995 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL 6.2 10. led by one of the largest field forces and rapid new launches but partly tempered down by a large base effect and increasing competition in some of the acute therapeutic segments.8m revenue per MR. This is below our forecast of 15-16% CAGR for the industry. for more profitable growth.9 Industry Source: Industry/Company/MOSL Cipla 35.7 15.786 25.2 12.400 2004 5. which increase marginally to INR4. Cipla is likely to maintain its leadership in the sector given its high market share in some of the largest therapeutic segments. In 2004.9 Sales force addition CAGR (%) Productivity Improvement CAGR (%) 13.3 2010 1.8 2.180 7/10 August 2011 43 . Cipla derived INR4.7% while its sales force grew at a CAGR of 13.4%. Improvement in MR productivity: Sales force additions drive top-line growth Over FY04-10.100 11. CAGR and scale up: 6/10 We expect Cipla's domestic formulations business to post 12% CAGR over FY11-13.2 12.5 0. of MRs Revenue per MR (INR m) 4. Although Cipla employs the largest field force in the industry.5 YoY Grow th (%) 15.9 10.4 4.

0 27.3 23.8 21.  Has one of the largest global CFC-free inhaler capacities.3 69.916 8.4 44.7 44.8 26.7 53.  Signing of supply agreements with MNCs.548 52.756 6.  Low-risk partnership model  Large underutilized capacities.4 56.430 51.  Working capital intensive.  Potential tie-ups with MNCs.9 Source: Company/MOSL Source: Company/MOSL August 2011 44 .188 5.567 FY12E FY13E FY11-13 CAGR (%) EBITDA Contribution Non-DF EBITDA 56% DF EBITDA 44% 30.004 51.9 7.729 13.816 2. large underutilized capacities and strong generic pipeline.663 11. Non-domestic business: Cipla's non-domestic business Positives  Strong presence in emerging markets through partners.  Short-term performance may be muted until international regulatory authorities approve the new Indore SEZ. Key news flow/triggers Regulatory approvals for a new SEZ.579 FY11 28.4 29.Cipla 7.5 2.0 53.2 36.  Impact assessment We are positive on Cipla's international business given its strong chemistry skills.113 44.953 FY10 25.792 1.539 7.180 11.775 1.786 43.795 2.645 12.995 35.0 1.9 63.  Expect international business to record 13% CAGR over FY11-13. led by 14% CAGR of formulation exports.5 29.  Option values (approval for CFC-free inhalers and potential MNC contracts) can upgrade FY13 EPS.431 34. 5/10 Risks and concerns  Temporary mismatch between expenses on new SEZ without commensurate revenue streams pending regulatory approval.  Delay in planning capacity expansions for future growth.2 52.842 2.  Sales mix (INR m) FY09 Domestic % of revenues Exports % of revenues Formulations APIs Other Operating Income % of revenues Total Revenues 22.  Strong chemistry skills and fully backward integrated low-cost operations.  Regulatory approvals for CFC-free inhalers in Europe.3 33.737 5.1 2.971 42.178 44.838 -0.741 79.635 5.462 4.  Lack of succession planning.

0 18. Cipla RoE & RoCE (%) RoE 19. Earnings growth and stock attractiveness: 21/30 We believe Cipla has one of the strongest generic pipelines among Indian companies.4 12 Mar-07 Feb-08 Feb-09 Feb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 Peak(x) Min(x) 17 2008 2009 2010 2011 2012E 2013E August 2011 45 .1 15.5 17. Cipla's large manufacturing infrastructure.7 14.8 14.2 17. The growth will be led by 13% CAGR for the international business.4 15. along with its low-risk strategy and a strong capex (currently underutilized) should ensure good long-term potential. After a long delay. When details of such contracts are made public. Cipla's management has officially confirmed that it is negotiating supply contracts with MNCs. We estimate base-case EPS CAGR at 17% over FY11-13 with potential upsides from MNC supplies and CFC-free inhalers. increased expenses to maintain its Indore SEZ without commensurate revenue and increasing working capital requirements are our key concerns.Cipla 8-9.1 20. Temporary slow-down in overall growth.1 17. This.6 RoCE Cipla one year forward P/E 32 P/E (x) Avg(x) 29. we expect an upgrade in earnings to take into account upsides from such contracts. strong chemistry skills and huge inhaler capacity make it a partner of choice for global MNCs that are ramping up their generics and presence in emerging markets. We are positive on Cipla's long-term prospects (especially upsides from MNC contracts and commercialization of CFC-inhalers). we believe Cipla's CFC-free inhaler pipeline is likely to be gradually commercialized in Europe and upsides from high-margin opportunities like Seretide can potentially come through over the next two years (our estimates do not include these upsides).8 22 19. it is taking time to consummate the deal.8 17.9 18. Maintain Buy with a target price of INR361 (22x FY13E EPS).6 15. tempered by reducing technology licensing income. However.5 27 22.

8 30. This compares favorably with reported revenue of INR56b in FY10 and revenue of INR63b in FY11. commensurate revenue to ramp-up Cipla has invested significant amounts of money. Cipla invested INR18b in expanding its formulations. Cipla's management is known for its conservative. A large portion is this capex is underutilized pending facility/product approvals from international regulatory authorities. Significant expenses on Indore SEZ.5 10. One of its large investments has been in the INR8b Indore SEZ. Cipla's gross block (INR b) 43. low-risk strategy. Cipla entered into partnership for 118 products with 22 partners. 64 have been approved and 46 are awaiting approval.7 14. over the past 2-3 years.Cipla Annexure: Cipla non-domestic business Strong generic pipeline In the US.9 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company/MOSL …can lead to INR36b in revenue over the next few years Going by Cipla's past asset-turnover ratios.6 24. on setting up facilities. Strengthening US parnerships (nos) 22 17 12 8 FY07 FY08 FY09 FY10 Source: Company/MOSL Strong capex… Over the past three years. This is one of the largest investments in an SEZ by a pharmaceutical company. which implies it would not have embarked on such a large capex without reasonable revenue visibility. The number of partners increased from 17 to 22 over the past 18 months. we estimate this large capex can generate INR36b in revenue in the next few years. August 2011 46 .3 35. Of the pipeline of 110 ANDAs filed so far. API and R&D capacities. commissioned in 1QFY11.3 18.

pending regulatory approvals. The management also indicated it expected this SEZ to contribute 10-12% to overall sales by the end of FY12.720 PAT Margin (%) .assumed 50 Cost of outsourced products for Pfizer (USD b) 4 Upside for Cipla Low Case Cipla's contribution to Pfizer's outsourcing (%) 1 Sales (USD m) 40 INR/USD . strong chemistry skills and large capacity for inhalers. such deals span many products and multiple markets. Generally. Aerosols/Inhalation Devices Capacity (m) 143 . It expects exports to these markets to ramp-up up gradually in forthcoming quarters.6 3.600 17.assumed 43 Sales (INR m) 1. This is a key factor impacting Cipla's operational performance. Inhaler capacity has increased. Australia and South Africa had recently inspected this facility.3 Moderate Case High Case 5 10 200 400 43 43 8. Cipla has the advantage of strong chemistry skills and low-cost of production in this segment.. Pfizer Partnership: Potential Upsides Pfizer's generic revenue (USD b) 10 Estimated mark up over outsourced products (%) 25 Outsourced products (percentage of total) .. The Cipla management has indicated regulatory authorities from the UK...assumed 15 PAT (INR m) 258 Incremental EPS 0. We believe Cipla is well positioned to emerge as a key supplier of generic products to global MNC companies due to its large manufacturing infrastructure. negotiations ongoing Cipla is negotiating with some MNCs like Pfizer. but utilization is at the lowest Aerosols/Inhalation Devices Capacity Utilization (%) 89 80 96 96 67 64 56 77 71 46 54 71 38 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Source: Company/MOSL August 2011 47 . These potential contracts are likely to raise earnings for FY13 (not included in our estimates). We believe the company is facing a temporary mismatch between timing of such expenses and commensurate revenue streams from this investment. The US FDA inspection is yet to take place.Cipla The company is incurring expenses of INR250m-300m per quarter on this SEZ without commensurate revenue.2 Source: Company/MOSL CFC-free inhalers a key long-term trigger Cipla has the third largest global capacity for inhalers and has been the domestic market leader in the segment over years.200 15 15 1290 2580 1. GSK and Boehringer for long-term supply agreements. Potential MNC contracts can upgrade earnings.

Cipla Cipla is developing eight inhalers and has the third largest inhaler manufacturing capacity globally. given its annual net exposure of ~US$300m as well as some exposure to the euro. it earns licensing income from its partners.579 10. Germany.1 Upside for Cipla Low Case Cipla's market share (%) 1 Sales (USD m) 51 INR/US dollar (assumed) 43 Sales (INR m) 2. Neo Labs.5b global brand with US$250m sales in the UK) in September 2008 in the UK. However. August 2011 48 . The management expects its range of eight inhalers to be commercialized in Europe over the next 2-3 years and it expects 3-6 players for each product in this category. Our estimates do not include these upsides. While the launch of these inhalers is a key long-term trigger. We believe Cipla is under-hedged. It has commercialized some of its inhalers in the UK. Cipla filed for regulatory approval of a generic Seretide Inhaler (GSK's US$6. Current forex hedges are US$190m (down from USD230m in September 2010). adversely impacting Cipla's earnings growth (licensing income has 100% contribution to the company's PBT).7 Source: Industry/MOSL Reducing technology licensing income Given Cipla's partnership model. high-margin opportunity.965 20 20 1.193 1. We believe that approval for this product is likely to come through over the next few quarters.538 765 415 424 637 510 510 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL Forex cover . implying that this will be a low-competition.6 2. Spain and Portugal.currently under hedged Cipla's management continues with its policy of hedging net exposure on a monthly basis. which we believe will be inadequate if the rupee were to appreciate significantly against the US dollar. this has fallen to INR637m by FY11. the visibility of launch timelines is poor. Reducing licensing income Tech Licensing Income (INR m) 2.193 PAT margin (%) (assumed) 20 PAT (INR m) 439 Incremental EPS 0. This income has been a key contributor to Cipla's earnings and it recorded 26% CAGR to INR1.5 Moderate Case High Case 3 5 153 255 43 43 6.178 1.316 2. Through its partner. CFC-free Inhalers: Potential Upside Current global market size of inhalers (USD b) 17 No of generic players including Cipla (assumed) 6 Price erosion (%) (assumed) 70% Addressable market size (USD b) 5.534 1.5b over FY07-10. after the expiry of GSK's data exclusivity.

7 19.5 42.973 8.973 1.842 63.3 15.606 64.5 16.742 Interest/Dividends Recd.954 16.311 -950 13.039 0 11.760 10.726 18.112 6.760 11.239 -126 -3.911 18.0 4.791 11.946 2.651 -6.209 17.825 14.500 0 -4. 11.620 20.126 15.175 14. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -5.359 12.057 7.938 0 12.6 3. of Funds 2010 1.6 73.462 56.411 14.614 480 869 85.386 -3.511 42.645 34.499 283 1.690 19.8 15.464 43.962 51.259 59.004 24.0 Cash Flow Statement Y/E March 2010 Op.643 1.671 12.7 Ratios Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2010 12.9 6.8 13.690 20.218 20.379 390 621 1.2 2.893 18.144 12.0 36.2 82.375 -3.7 25.122 11.1 42.177 13.971 30.688 6.6 0.036 90 74.380 79.447 1.315 23.861 20.809 91 530 621 2011 13. Profit/(Loss) before Tax 13.017 16.0 13.4 17.908 1.0 15.587 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin.606 73.614 -2. and Finance Charges Other Income .4 89 103 183 3.798 14.842 2.010 2. Deprn.8 9.0 -6.5 15.070 2.010 11.357 16.234 13.671 9.0 2013E 16.801 47.000 0 -2.548 27.000 0 -5.0 23.4 17.983 3.1 16.779 2.066 1.070 0 16.357 -3.742 24.5 4.315 1.660 1.619 11.6 14.2 33.077 3.2 15.927 13.912 -9. 469 Direct Taxes Paid -2.606 82.6 2013E 77.2 93 107 191 2.5 14.476 14. incl EO Exp.6 2. Tax Tax Rate (%) Reported PAT Adj PAT Change (%) Margin (%) 2010 54.719 1351 79.7 1.285 (Inc)/Dec in WC -1.938 -4.017 16.0 2.218 1.9 2.511 (INR Million) 2012E 1.122 -1.904 46.144 31.802 2. Account Payables Net Current Assets Appl.117 7.0 5.731 3.139 -4.4 20.609 32.241 14.071 230 469 12.289 CF from Operations 10.6 18.8 102 98 201 2.853 5.Cipla Financials and valuations: Cipla Income Statement Y/E March Gross Sales Change (%) Exports Net Domestic Sales Other Operating Income Net Income Change (%) Total Expenditure EBITDA Margin (%) Depreciation EBIT Int.5 30.4 17.8 29.0 0.6 53.801 85. PBT before EO Items Extra Ordinary Expense PBT but after EO Exp.6 49.062 14.261 2.8 16.367 14.625 0 11.000 -283 -2.3 2.838 79.791 34.193 9.470 -2.0 10.8 Balance Sheet Y/E March Equity Share Capital Reserves Revaluation Reserves Net Worth Loans Deferred Liabilities Capital Employed Gross Block Less: Accum.3 (INR Million) 2012E 67.904 2. Liability & Prov.668 -173 -2.0 25.755 1.450 0 13.625 1.242 43.643 22.2 3.410 90 59.530 60.041 14.145 12.367 11.241 38.177 22.7 0.260 12.666 621 12.592 2.3 3.500 0 -3.0 3.948 28.077 2013E 18.558 1.0 3.855 52.050 29.9 0.719 2131 74.550 15.606 57.450 2.9 2011 61.826 10.8 12.190 2.5 86 110 195 2.318 22.839 126 1.690 -4.2 14.889 9.411 11.826 2.4 2.918 90 84.826 867 5.962 E: MOSL Estimates August 2011 49 .837 0 9.5 1.2 3.465 30.671 -3.1 18.039 -5.775 69.8 2012E 13.085 33.1 3.948 2011 1.673 15.106 51 1792 60.855 12.435 18.0 3.853 5.8 2011 12.144 12.542 10.315 13. Net Fixed Assets Capital WIP Investments Curr.234 -3.966 10.599 19.3 93.837 -9.294 -6.3 7.7 0.853 5.7 105.808 74.037 -1.661 5.2 60.637 EO expense -950 CF from Oper.904 2013E 1.0 20.440 -12.4 10.352 -230 -2. Assets Inventory Account Receivables Cash and Bank Balance Others Curr.677 173 1.077 3.966 90 66.5 17.8 14.6 17.Rec.4 20.010 (INR Million) 2012E 15.

Domestic Formulations | New Peaks

MEDICINES

CAPSULE

Lupin
CMP: INR450 TP: INR514

MEDICINES Score

62/100
LPC IN

Transformed transnational
M: Mix 5/10

Buy
6/10

E: Equity with doctors

Lupin is a balanced play on the domestic chronic and acute therapeutic segments. The company derives 43% revenue from chronic therapeutic areas. The respiratory, AI, CVS and Anti-TB segments contribute 56% to Lupin's domestic formulation revenue.

Lupin has moderate brand equity in the pharmaceutical industry but good brand equity in select segments like the anti-TB segment, in which it ranks No1 in the industry. Lupin has been gradually improving its brand equity in the CVS and anti-diabetes segments and has improved its prescription ranking in the segments considerably over the past four years.

D: Distribution & reach

6/10

I: Introductions

6/10

Lupin derives 70% of its revenue from metros and tier-I cities. Distribution reach in metros and tier-I towns increased significantly and the contribution of other geographies to revenue has reduced over the past four years. Lupin has a field force of 3,682 MRs.

Lupin has been aggressive in launching new products over the past four years, compared with its peers. It launched 67new products and line extensions a year over the past four years. New launches contributed significantly to Lupin's revenue growth over the past few years.

Stock info
Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b) 446.2 520/348 12/20/29 200.8 4.4

Financial & valuation summary
Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 47,405 57,068 64,784 74,127 6,816 8,582 9,913 11,418 15.3 19.3 22.3 25.7 EPS Gr. (%) 34.8 25.9 15.5 15.2 P/E (x) 29.4 23.3 20.2 17.5 P/BV (x) 7.8 6.1 5.0 4.1 RoE (%) 34.1 29.3 27.1 25.7 RoCE (%) 27.5 25.1 28.2 27.1 EV/ EV/ Sales EBITDA 4.4 3.6 3.2 2.7 24.6 19.5 16.8 13.8

Background

Lupin is a second tier company actively targeting the regulated generics markets. Historically very strong in the anti-TB segment, it has over the years built up expertise in fermentation-based products and segments like cephalosporins, prils and statins. It is also in the process of building a niche portfolio of oral contraceptives and branded products in the US market.

August 2011

50

Lupin Lupin

Chairman Profile

Chairman

Lupin is promoted by Dr. D. B. Gupta (Chairman), a first generation entrepreneur supported by a team of senior professionals including Dr. Kamal Sharma (MD). Rapid scale-up in the US market (despite being a relatively late entrant), significant improvement in the product and geographical mix over the past 5 years coupled with strong backward integration skills are the key achievements.

C: CAGR and scale-up

8/10

I: Improvement in productivity

5/10

Lupin significantly outperformed the industry with revenue CAGR of 21% over FY05-11. It has scaled up the business rapidly though on a very low base. However, the main growth driver was the tripling of its field force and aggressive new launches, rather than an increase in productivity. We expect Lupin to post 18% revenue CAGR over FY11-13 outperforming the industry, led by a rapidly expanding presence in the fast growing chronic therapeutic areas like CVS and anti-diabetes segments, an increase in the field force and aggressive new launches.

Lupin was not able to improve MR productivity over 2004-10. Revenue per MR was stagnant at INR3.6m over 2004-10. At this level the productivity is in line with the industry average.

N: Non-domestic business

6/10

E: Earnings growth

6/10

We are positive about Lupin's international business, given its strong and differentiated portfolio in the US and its gradually expanding presence in Japan. We expect Lupin's international business to post 13% CAGR over FY11-13, excluding upsides from Para-IV sales. Option values include upsides from Para-IV products in the US.

We expect overall top-line CAGR of 14% over FY1113 leading to EPS CAGR of 15.3%. Regulated markets and India formulations will be key growth drivers.

S: Stock Attractiveness
Cautious approach to international expansion coupled with a highly profitable US business has ensured good return ratios in the past. We expect this to sustain in future. Lupin is valued at 20.2x FY12E and 17.5x FY13E consolidated earnings. Reiterate Buy with a target price of INR514 (20x FY13E EPS) excluding potential one-off upsides.
Stock performance (1 year)

14/20
Lupin Sensex - Rebased

520 465 410 355 300 Aug-10

Nov-10

Feb-11

May-11

Aug-11

August 2011

51

Lupin

India formulations snapshot
Domestic formulations: Meaningful contributor to revenue, profitability The domestic formulations business is a meaningful contributor to Lupin's revenue and EBITDA with contribution of ~25%. Unlike some leading companies in the domestic formulations space, we believe Lupin's profitability in this business is lower than its peers due to a significant presence in anti-TB segments and rapid expansion of sales force. The business posted revenue CAGR of 21.5% over the past six years. EBITDA Contribution DF EBITDA 25%

Transformed transnational
Transiting from acute to chronic, generic to branded
Lupin is among the leading Indian companies in the domestic formulations segment. The company holds a leading position in the anti-TB segment and is among the leaders in the CVS and anti-diabetes segments. Lupin's revenue growth over the past few years has been driven by an augmented sales force and new launches. Lupin derives a large part of its revenue from metros and class-I towns. It is expected to sustain its out-performance to the industry in future.

1. Mix:

5/10

Respiratory, AI, CVS, anti-TB dominate sales The top four therapeutic segments, CVS, AI, respiratory and anti-TB contribute ~56% to Lupin's domestic formulations revenue. Lupin derives ~43% of its domestic formulations revenue from chronic therapeutic segments. It used to derive about half its domestic formulations revenue from the Anti-TB segment 10 years ago. However, Lupin's dependence on the segment has fallen considerably and it now contributes ~10% to revenues. Meanwhile, It has increased its presence in the CVS and respiratory segments over the past 10 years.
CVS, AI, Respiratory and Anti-TB dominates the therapy mix
FY01
Others 9% CVS 5% AI 21% Respira tory 0%

Non-DF EBITDA, 75% Among the top 10 players in the industry Lupin ranks among the top 10 players in the domestic formulations industry in terms of revenues. It commands 2.69% market share, which has grown from 2.32% in 2006. Lupin has outperformed the industry over the past six years with revenue CAGR of 21.5% against the industry CAGR of 14%. Lupin

Pain 4% VMN 11% CNS 1% GI 1%

Others 20% Pain 3%

FY05
CVS 11% AI 23%

Diabetes 5%
Anti-TB 48%

GI 3%

Anti-TB 33%

Respira tory 2%

Others 22% Pain 2% Gynaecology 3%

FY11

CVS 21%

Mkt Share (%) Grow th (%) 25.0 24.2 22.7 18.7 12.3 2.32 2.75 2.69

AI 16% CNS 4%

2.5

2006 2007 2008 2009 2010

2.8

Diabetes 7%

GI 6%

Anti-TB 10%

Respiratory 9%

Source: Company/Industry/MOSL

August 2011

52

5 CVS Respiratory Anti-Diabetic CVS Respiratory Anti-Diabetic * Average growth over 2009-2010 Source: Industry/MOSL In terms of the number of prescriptions written. None of these feature in the top 100 brands of the industry. 6 and No. respiratory and the anti-diabetes segment. Its No1 brand.917. In CVS.8 27. 7 with market share of 5. (Atorvastatin. Tonact. Equity with doctors: 6/10 Brand equity among physicians strong in some therapeutic segments Lupin's brand equity is strong in some therapeutic segments like anti-TB. The absence of big brands indicates Lupin's limited brand building ability in segments other anti-TB therapy. Lupin's prescription ranking Jan-07 Anti-TB CVS Anti-diabetic CNS Anti-infectives Respiratory 1 9 8 13 13 17 Jan-08 1 7 8 13 12 16 Jan-09 1 7 8 17 13 16 Jan-10 Oct-10 1 1 6 5 8 6 13 13 14 15 17 15 Source: Industry/MOSL Top 10 brands contribute 20% of the revenues Lupin's top 10 brands contribute ~20% to its revenue. It ranks fifth in the CVS segment with a prescription market share of 5% and ranks sixth in the anti-diabetes segment with a market share of 4.6 4.Company Avg Gr . August 2011 53 .Industry 39. No. CVS) ranks No101 in the industry and it reported 19% growth over the past four years.8 3.9%.9 16.8% respectively.7 23. Market share in key therapies (%) 5. outperforming the segments' growth.Lupin 2. indicating low brand concentration. 7. but overall it has average brand equity.8% and 3.3 17. 4. Lupin ranks No. in which it ranks No1.6%. Lupin has consistently led the anti-TB segment with a prescription market share of 51%. It has been gradually improving its brand equity in the CVS and anti-diabetes segments and improved its prescription ranking in these segments over the past four years.2 Growth comparison (%) (2010) Avg Gr . It has been improving its market share in these segments over the past few years.

5 CY07 29.4 19.7 27.3 19.7 17.2 Class I Tow ns Class II to VI Rural Industry: Geography-wise growth rates (%) Metros Class I Tow ns Class II to VI Rural 26.6 20.6 Class I Tow ns 20.6 20. The contribution of the metro region to the sales grew from 28% to 34% over the past five years.9 Class II to VI 13.1 Source: Industry/MOSL 3.4 23.7 15.0 43.5 Class I Tow ns 17.3 Geographical distribution of revenues: Industry (%) Metros 20.2 21.1 7.5 16.6 15.0 19.6 17.1 9.4 14.4 19.1 13.3 20.7 9.5 15.2 27.4 32. Distribution and reach: 6/10 Lupin derives 70% of its revenue from metros and class-I towns compared with 63% of the industry average.7 14.2 36.5 2.3 30.2 22. The outperformance is significant in metros and class-I towns.9 34.6 CY06 28.2 21.3 35.1 17.6 17.6 6.5 20.0 18.0 27.6 36. R-cinex Anti-TB Budamate Formoteral+Budesonide L-cin Levofloxacin Odoxil Cefadroxil oral Esiflo Salmeterol+Fluticasone Rablet Rabeprazole Percin Other quino CAGR through 2006-10 18. Over the past four years.2 25.9 CY09 34.4 22.2 13.9 19.0 August 2011 54 .Lupin Lupin's top 10 brands Brand Drug Product Launch 2000 2001 2003 1986 2004 2002 1989 2004 2002 2007 Sales (INR m) 476 273 262 257 252 245 214 207 197 194 YoY Gr (%) CAGR (%) Tonact Atorvastatin Ramistar Ramipril Gluconorm-g Glimepiride+Metform.7 Rural 11.0 CY07 CY08 CY09 CY10 6.9 2.9 CY08 30.6 -8.1 19.6 Class II to VI 18.0 -3.0 31.2 21.1 18.0 11.9 17.7 14.8 CY06 29.5 31.5 11.8 38.0 27. revenue CAGR for various geographies has been much higher than that of industry average except for in rural areas.6 19.5 CY08 31.3 19.2 32. Lupin: Geographical distribution of revenues (%) Metros 17.0 CY09 31.3 -6.3 2.5 Rural 17.5 CY07 CY08 CY09 CY10 Source: Industry/MOSL 17.9 13.6 32.2 -10.3 18.7 10.9 CY07 28.0 CY10 CY10 Lupin: Geography-wise growth rates (%) Metros 31.4 14.2 35.2 23.

increase in its field force and new launches.4 97. However average revenue per new launches has been stable over the period. Lupin: Domestic formulations revenue rampup India Formulation Sales (INR M) 26.4 19.0 18.2 11.5 11.0 7. compared with its peers.1 20.0 10. clocking revenue of 21.718 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL August 2011 55 .6 CY09 CY10 Source: Industry/MOSL 5. Introductions: 6/10 Lupin has been among the most aggressive players in launching new products Lupin has aggressively launched new products over the past four years.281 15.0 22. CAGR and scale up: 8/10 We expect Lupin's domestic formulations to post revenue of 18% CAGR over FY11-13 led by a rapidly expanding presence in fast growing chronic therapeutic areas like CVS and anti-diabetes. New launches contributed significantly to Lupin's revenue growth over the past few years though average revenue per new launch declined from INR104m in CY07 to INR65m in CY10.087 9.8 17.0 Lupin: Growth composition (%) New Launches Existing Brands 73.5% CAGR over FY05-11.4 Grow th (%) 18.2 16.8 100 CY07 91 CY08 177 CY09 175 CY10 CY07 CY08 -1.412 13.496 11. Lupin: New launches No.2 64.863 18. We believe Lupin will continue its out-performance of the industry as historically it has grown much faster than the industry. Of launches in last 2 yrs Avg sales per launch (INR m) 104. It launched 67 new products annually (including line extensions) over the past four years.7 14.Lupin 4.3 7.

219 0.1 2004 2010 1.2 11. Non-domestic business: 6/10 Lupin's non-domestic business snapshot Positives  Lupin has demonstrated one of the fastest ramp-ups in the US. coupled with some branded products.6m per MR. Lupin derived revenue of INR3.  August 2011 56 . Key news flows/triggers Ramp-up in Antara sales in the US. Compared with the average of companies covered in this report.  It is the only Indian player to have a branded presence in the US and has been an early entrant in Japan through Kyowa acquisition.  Delays in receiving US FDA approval for oral contraceptives. Improvement in MR productivity: 5/10 Lupin's top-line growth is driven by additions to its sales force.2% CAGR.  Potential acquisitions in Japan and Latin America. and gradually increasing precription share. Lupin's performance was below average. led by branded and generic products.6 Revenue per MR (INR m) 3.682 20.  US FDA approvals for oral contraceptives.9 Industry Lupin Source: Company/Industry/MOSL 7.Lupin 6. which was the same in FY10. In 2004. but has not been able to improve productivity Lupin's domestic formulations business revenue posted 20. of MRs 3.  It is highly cost competitive due to backward integration for most of its products.4% CAGR over FY04-10 and its sales force grew by 20.  No major progress on NCE research despite working on it for many years. Lupin: Sales force productivity No.  Trying to build a differentiated portfolio in the US by targeting niche segments of oral contraceptives and ophthalmology. implying stagnant MR productivity.5 1.6 Sales force addition CAGR (%) Productivity Improvement CAGR (%) 3. Risks & concerns  Generic competition for Suprax (a key product) in US.

991 47. Lupin continues to target niche. Sales mix (INR m) FY09 India APIs Formulations Total % of sales Regulated APIs Formulations Total % of sales Un-regulated APIs Formulations Total % of sales Others Grand Total FY10 FY11 FY12E FY13E FY11-13E CAGR (%) 2.640 18.358 32.477 4. Our estimates do not include one-time upsides for Lupin's FTF pipeline in the US. any out-of-court settlement for Suprax patent litigation is likely to raise our earnings forecast for FY13.718 21.393 9.234 23.514 15.678 2.462 13.385 31.192 11.7 543 23.0 -3. strong performance in emerging markets (including India) and sustained traction in the Japanese business. niche/Para-IV opportunities in the US.565 3.777 49.769 16.1 4.8 579 31.9 4.7x FY12E and 17.3 417 38.863 18.2 5.281 15. excluding upsides from Para-IV sales.412 13.772 22.583 32. Our estimates factor in the potential competition for Suprax in US.826 50.3 EBITDA Contribution DF EBITDA 25% 2. led by an expanding US generics pipeline.4 5.0 12.177 15.751 6.5 11.0 5.9 Non-DF EBITDA 75% 5. August 2011 57 .  We expect international business to record 12% CAGR over FY11-13.930 6. low-competition opportunities to drive growth and improve profitability. Its initiatives in the US oral contraception space are efforts in this direction.  Option values include upsides from Para-IV products in the US.0 16. 19.3 562 35. Earnings growth and stock attractiveness: 20/30 Lupin is likely to gradually improve its fundamentals.204 7.604 35.965 49.859 33.422 2. given its strong and differentiated portfolio in the US and its gradually expanding presence in Japan.711 7.238 2.6 17. Maintain Buy with a target price of INR514 (20x FY13E EPS).229 28. While our estimates factor in generic competition for Suprax from FY13 onwards.2 11.0 18.574 14.377 32.039 5.302 13.139 27.0 Source: Company/MOSL 8-9.870 17.175 74.Lupin Impact assessment  We are positive about Lupin's international business.3 550 47.0 597 28.296 1.7 390 437 65.226 16. The stock trades at.5 17.341 17.539 36.6 650 17.2 348 57.087 24.1x FY13E EPS with a sustained ~25-30% RoE.101 48.

Lupin in-licensed Suprax brand from Fujisawa (the latter had stopped promoting this brand in the US) and ramped-up sales of the product through price increases. 1. Lupin has scheduled similar launches in FY12. While Lupin does not disclose Suprax revenues separately. we believe the brand holds promise. The commercialization of its oral contraceptive (a US$4. 2.1 17 11 5 Mar-07 Feb-08 Aug-06 Aug-07 14. Expanding brand portfolio in the US through acquisitions/in-licensing After its success with Suprax. posted FY11 US revenues of INR20b.6 27.8 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 2009 2010 2011 2012E 2013E Lupin non-domestic business: key trends. focusing on niche. This was achieved through brand acquisition/in-licensing.it is the only Indian company to do so.1 P/E (x) Avg(x) Peak(x) Min(x) 23. low-competition products. 2. Lupin's niche initiatives in the US have helped it to achieve two main objectives.5b market in the US) products will add to its protfolio from FY13.9 19. Lupin. It rapidly ramped up US revenues with 9x growth CAGR over FY06-11 to INR20b. It significantly improved the profitability of its US operations since branded innovator products and low-competition/patent challenge generic products enjoy higher profitability compared with normal generic products. triggers & risk US generics: One of the fastest entries by an Indian player Lupin has the distinction of achieving the fastest ramp-up in the US by any Indian company.1 28. Niche/patent challenge upsides in the US to continue The trend of launching niche products in the US will continue.1 29. The other two brands are likely to contribute to revenue in the long-term. Targeting niche opportunities resulted in better profitability Lupin has differentiated itself from other Indian generic companies in the US by: 1.1 34.6 7.5 RoCE (%) Lupin one year forward P/E 29 23 27. While it is yet to replicate the Suprax success for Antara. a growth of 9x over FY06-11. volume growth and the launch of line extensions of the brand. which entered the US market in FY05. After the contribution from generic Lotrel during FY11.Lupin Lupin RoE & RoCE RoE (%) 37. Lupin has attempted to expand its brand portfolio in the US by acquiring the Antara brand in FY10 and in-licensing a couple of brands from other players.5 25. A few years ago.3 25.7 27. supported by an aggressive pace of filings in the US market. August 2011 58 .2 25. Launching at least one low-competition/patent challenge product in the US every year over the past few years. we estimate they contributed USD80m-90m to its FY11 US revenues. Focusing on branded innovator products .

Japan can be a large opportunity in the long term Japan is the new emerging opportunity in the global generics market with the Japanese government trying to reduced overall healthcare costs in the US$70b Japanese pharmaceutical market. Gradually expanding profitability of Japanese operations Lupin expanded gross margins for Kyowa from 33% to 40% over the past two years and is shifting part of its manufacturing to its Indian facilities. We estimate 17% revenue CAGR for the Japanese operations. We. Given that Lupin will be a new player in the oral contraceptives market. To strengthen this portfolio. The remaining products will target a branded US market worth about USD5b. Lupin has made 23 filings in the oral contraceptives segment as part of its strategy to exploit niche and low-competition segments. Lupin acquired Kyowa in October 2007 and ramped-up the business to INR6. August 2011 59 . These initiatives are likely to gradually expand the profitability of Lupin's Japanese operations in the long-term. we have conservatively factored in upsides from this opportunity from FY13 despite the management guidance of launching 3-4 products in FY12. These potential low-competition launches along with a steady ramp-up in its branded revenue in the US (sales force strength increased from 70 to 160 MRs) will enable Lupin to sustain double-digit growth. The government has.2b by FY11. However. it is better positioned to exploit the Japanese generics opportunity compared with its peers. legislated to encourage the use of generics. given the Japanese market's concern for quality products and a brand-conscious mentality. led mainly by new launches. In FY12 Lupin will shift some of trhe API production to India and the formulation manufacturing will be gradually shifted to India from FY13. in the past two years. progress has been gradual for generic products. Our estimates exclude potential one-off opportunities. it is focusing on filing products in the ophthalmology and dermatology segments. which is likely augment margins. One of the few companies to access Japan's generics market Given Lupin's entry in the Japanese generic market through the Kyowa acquisition. believe the Japanese market holds huge long-term potential for generic players who can convince the Japanese population about the quality of their products. A successful presence in such a market will require tie-ups/associations with known local names since Indian companies are still unknown entities in Japan. however.Lupin The management has guided for 12 new launches in the US in FY12 of which 3-4 are expected to be oral contraceptives (with branded market size of USD300m-500m). We factor in 9% revenue CAGR for Lupin's US operations (over FY11-13) after factoring in the slowdown in the US branded business and potential competition from generic Suprax.

928 15.865 3.750 8.399 38.6 4.500 0 -4.445 8.8 14.928 -1.996 233 -4.8 8.2 16.605 1.2 85 77 125 0.7 2.063 -2.029 -834 -385 -1.312 32 3.6 23.255 39.239 7.3 87 77 127 0.6 6.8 1.755 8.360 16.857 12.997 37.893 9.5 29.7 108.312 32 3.7 1.341 -1.1 2.457 2.1 3.1 Cash Flow Statement Y/E March 2010 Oper. Liability & Prov.068 20.750 25.714 6.536 18.967 12.869 8.201 (INR Million) 2012E 12.072 15.918 32.063 15.0 1.3 87 77 131 0.955 10.405 25.714 4.4 2.624 50.750 13.194 2.1 57.7 13.6 19.811 515 1.8 21.2 2.921 12.688 15.497 11.3 168 8. Net Fixed Assets Capital WIP Investments Goodwill & Intangibles Curr.3 23.197 27.579 264 3.4 34.405 -4.1 Consolidated Balance Sheet Y/E March Equity Share Capital Fully Diluted Equity Capital Other Reserves Total Reserves Net Worth Minority Interest Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum.0 15.718 20.4 59.327 1.4 2.7 20.7 250 9.340 -6. of Funds E: MOSL Estimates 2010 889 889 24.1 28.789 25.794 11.Rec.169 11.7 30.1 15.624 46.444 515 1.903 325 1.755 9.1 27.9 2012E 22.201 4.997 6.034 15. incl EO Exp.957 3.193 -2.238 778 2.500 -270 -3.994 2.000 12.551 47.478 CF from Op.361 26.3 17.590 12. and Finance Charges Other Income .413 18.454 -49 -6.473 40.000 -232 -3.816 2011 57.841 33 4.825 3.3 26.357 232 1.916 30.194 18.521 14.558 4.366 515 1.2 73.918 31. PBT before EO item PBT after EO item Tax Tax Rate (%) Reported PAT PAT Adj for EO items Change (%) Margin (%) Less: Minority Interest Adj Net Profit 2010 47.6 2013E 25.920 1.201 6.361 (INR Million) 2012E 892 889 39.591 12.000 -304 -3.5 6.9 5.248 12.759 11.411 8.418 Ratios Y/E March Basic (INR) EPS (Fully Diluted) Cash EPS (Fully Diluted) BV/Share DPS Payout (%) Valuation (x) P/E (Fully Diluted) Cash P/E (Fully Diluted) P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Wkg.4 46. Assets Inventory Account Receivables Cash and Bank Balance Others Curr.913 2013E 74.015 4.015 4.8 1.389 9.5 52.478 16.313 5. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -6.4 28. Account Payables Provisions Net Current Assets Appl.030 19.536 Interest/Dividends Recd.459 50.767 2011 892 889 31.0 28.8 270 11.414 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Change in Net Worth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin.243 15.624 55.266 2.2 16.1 27.715 11.923 25.5 0.239 304 2.916 2013E 892 889 47.483 3.3 25.857 1.123 -6.500 0 -4.748 14.763 300 226 -325 -1. Capital Turnover (Days) Leverage Ratio Debt/Equity (x) 2010 15.605 19.357 8.649 2. Deprn.255 34.688 11.411 11.503 6. 4.435 11.625 13.677 513 4.163 16.5 3.308 4.690 -4.500 -250 -3.784 13.921 -1.658 -1.889 11.3 19.789 24.3 18.634 22.8 180 6.278 22.1 15.4 6.567 16.389 13.297 385 1.8 1.994 35.110 5.285 55.186 2.518 11.928 10.767 22.5 14.625 -2.2 18.747 7.7 27.090 (Inc)/Dec in WC -4.0 11. 1.312 32 3.862 38.049 13.714 2013E 14.075 17.605 14.750 2.582 (INR Million) 2012E 64.445 Direct Taxes Paid -1. Profit/(Loss) before Tax 8.015 2011 10.7 2.800 2.747 August 2011 60 .401 8.449 46.2 2011 19.0 3.2 25.920 9.208 14.659 18.473 39.252 4.3 6.859 5.255 44.411 5.551 48.341 9.374 -4.Lupin Financials and valuations: Lupin Income Statement Y/E March Net Sales Change (%) Total Expenditure EBITDA Margin (%) Depreciation EBIT Int.7 90.3 90 75 122 0.0 10.678 255 1.127 14.5 38.410 10.937 7.357 1.659 1.

Domestic Formulations | New Peaks This page is left blank intentionally August 2011 61 .

040 22.6 1.8%. Torrent Pharma ranks 3rd with a prescription market share of 8.3 1.12 Rel. It has consistently maintained its leadership in these therapeutic classes.8 25. with strong brands and new product launches.9 25.1 47. Stock info Equity Shares (m) 52-Week Range (INR) 1. Torrent enjoys good brand equity with specialist in the CNS and CVS segments. Over the past four years.7 12. It's revenue growth is driven by its existing products as well as new launches.Cap.9 0.9 3. (%) 9.7 2.9 1. Torrent Pharma has a field force of 3.1 RoE (%) 36.6 EPS Gr.596 29.680 2.Domestic Formulations | New Peaks MEDICINES All's in place M: Mix CAPSULE Torrent Pharma CMP: INR589 TP: INR762 MEDICINES Score 61/100 TRP IN Buy 7/10 6/10 E: Equity with doctors Torrent is one of the better plays on remedies for high-growth lifestyle segments of CNS. CVS and diabetes.4 14.5 12. (USD b) 84. revenue CAGR for all geographies has been below the industry average except in Metro's. It derives 59% of its revenue from chronic lifestyle segments.7 31.1 24. Torrent derives its strength from being the leader in some of the most lucrative and fastest growing chronic therapy segments. CVS is the highest contributor with 35% contribution followed by CNS (21%) and Gastro Intestinal (17%).817 2.2% to 12.0 4.1% and in the CVS segment its ranks seventh with a prescription market share of 4.4 9.9 40.702 3.6.0 Background Though ranked 17th in terms of total revenue in the domestic formulations segment.8 P/E (x) 18. (INR b) M. Perf. Torrent Pharma has either maintained or improved its prescription ranking in the most of the therapeutic segments in which it operates.265 25.2 29.4 P/BV (x) 6. It launched 38 new products a year (including line extensions) over the past four years.392 4.6 18.3 27. D: Distribution & reach 6/10 I: Introductions 5/10 Torrent Pharma derives 73% of its revenue from metros and tier-I cities.7 RoCE (%) 28.7 24.6 687/497 3/19/18 54.8 3.6%.2 Financial & valuation summary Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 19.6 8. (%) M. August 2011 62 .600 Torrent Pharma's new product launch rate has been good compared with its peers in the industry. The contribution of rural areas to revenue has fallen over the past five years from 18.1 EV/ EV/ Sales EBITDA 2.Cap. In the CNS segment.2 29.6 18.029 31.6 12.

Torrent Pharma is valued at 14. Earnings growth will be driven by the domestic formulation business and increase in profitability of international operations.Torrent Pharma Chairman Profile Chairman Torrent Pharma was set-up by Late U N Mehta. Sudhir Mehta and Mr. We expect the international business to post 15. Option values include upsides from NCE business. The company has scaled up the business rapidly albeit on a low base and growth has been achieved largely because of a favorable therapeutic mix. Reiterate Buy with a target price of INR762 (16x FY13E EPS). C: CAGR and scale-up 6/10 I: Improvement in productivity 3/10 Torrent Pharma has significantly outperformed the industry with revenue CAGR of 19% over FY05-11.2m in 2010 N: Non-domestic business 6/10 E: Earnings growth 8/10 We are positive about Torrent Pharma's nondomestic business given it's has strong presence in Latin America and expanding its reach in various regulated and emerging markets. However the company has managed to improve the productivity over the last 6 years. his son Mr. RoIC is estimated at 40% over the next two years.5m in 2004 to Rs2.1%. We expect overall top-line CAGR of 16% over FY1113 leading to EPS CAGR of 22.4x FY13E consolidated earnings. he took a job as a medical representative for Sandoz. We expect these supplies to grow at 16.5% CAGR over FY11-13. CNS and anti-diabetes and improvement in brand equity. We expect Torrent Pharma to post 16% CAGR over FY11-13.7x FY12E and 12. Sameer Mehta handle the operations of the company. Stock performance (1 year) Torrent Pharma 700 650 600 550 500 Aug-10 Nov-10 Feb-11 May-11 Sensex . led by a strong presence in fast growing chronic therapeutic areas like CVS. S: Stock Attractiveness A focused and cautious approach to international expansion along with a highly profitable domestic business has ensured good return ratios. The company has tie-up with 3 global innovators for supplying various products. Later. Torrent Pharma ranks very low compared to its larger peers when it comes to field force productivity.Rebased 14/20 Aug-11 August 2011 63 . Revenue per MR improved from Rs1. Currently. outperforming the industry. improvement in brand equity and increase in field force productivity.7% CAGR over FY11-13 mainly led by the US and Latin American markets. Mr Mehta started his career as a clerk with the government. Post which he started his own business in pharmaceutical and eventually established the company.

AI and anti-diabetes contribute ~91% to Torrent's domestic formulations revenue. Torrent derived 40% of its revenue from the domestic formulations business in FY11. Torrent ranks No2 in the CVS and No. Mix: 6/10 The leading player in the chronic therapeutic segment Torrent Pharma has grown its market share over the years due to a significant presence in fast growing chronic therapeutic areas.0 2.e CNS and CVS.0 1. Market share has increased marginally Lifestyle segments like CVS.9% in 2006 to 2% in 2010. attractive valuation Torrent derives its strength from its strong positioning in some of the most lucrative and fastest growing chronic therapy segments. The segment is the most profitable for Torrent and contributes ~70% to consolidated EBITDA. CNS. Therapeutic break-up (FY05) Antidiabetic 3% others 2% Cardiac 36% Therapeutic break-up (FY11) Cardiac CNS Pain others Anti-diabetic Anti-infectives GI 5% 33% 19% Pain 6% Antiinfectives 14% 4% CNS 17% GI 22% 13% 5% 21% Source: Company/Industry/MOSL 2. among leaders in the CVS and CNS Torrent has been a dominant player in two of the industry's fastest growing therapeutic segments i. Torrent's sizable presence in the chronic therapy segments makes it an attractive play in the domestic formulations business. Torrent has 6 brands in the industry's top 300 brands. Domestic business has grown at a CAGR of 19% over the last 6 years through FY11.600 medical representatives (MRs). Equity with doctors: 7/10 Strong brand equity among specialists.1 2.9 1. CNS and CVS.1 2.3 in CNS segments with a value market share of 6. anti-diabetes dominate sales Torrent Pharma derives 59% of its revenue from chronic therapeutic segments. Non-DF EBITDA 30% Torrent Pharma DF EBITDA 70% 1. Torrent is among the market leader in two of the fastest growing therapeutic segments.9 2006 Mkt Share (%) Grow th (%) 25 20 15 10 5 0 2. which dominate the company's revenue mix. GI. 2007 2008 2009 2010 August 2011 64 . and has 37 brands in leadership positions in their respective molecule segments. The company has a field force of 3. The top five therapeutic segments including CNS. robust balance sheet.6% respectively. The company posted 19% CAGR over the past five years against 14% CAGR for the industry. It is among the largest companies in the chronic segments. It has consistently maintained its leadership in these therapeutic classes. profits The domestic formulations business contributes ~40% to Torrent Pharma's revenue. with strong brands and new product launches.Torrent Pharma India formulations snapshot Domestic formulations major contributor to revenue. down from 85% in FY04 due to relatively higher growth in its international business. CVS. Revenue/PBT Contribution All's in place Strong profitable growth.8% and 8. The company's market share has gone up from 1.

8 Growth comparison (%) (2010) Avg Gr .4 3.6 CVS GI CNS CVS GI CNS Source: Industry/MOSL * Average growth over 2009-2010 In terms of prescriptions Torrent Pharma has been one of the leading players in two of the industry's fastest growing therapeutic segments viz.8 16. which shows low brand concentration compared with other leading companies.1% and 4. Top 10 brands of the company Brand Dilzem Nikoran Alprax Nebicard Topcef Domstal Droxyl Azulix-mf Deplatt-a Lamitor CAGR through 2006-10 August 2011 Drug Diltiazem Nicorandil Alprazolam Nebivolol Cefixime Domperidone Cefadroxil Glimepiride+Metformin Aspirin + Clopidogrel Lamotrigine Product Category CVS CVS CNS CVS Anti-infective Gastro-intestinal Anti-infective Diabetes CVS CNS Product Launch 1987 1997 1988 2003 1994 1988 1989 2002 2002 1998 Sales (INRm) 475 410 396 252 235 229 213 197 191 170 YoY Gr. CVS) ranks 102nd in the industry and it posted revenue CAGR of 13% over the past four years.1 18. 7 in CVS segments with a prescription market share of 8. Four brands of the company feature among the top 300 brands of the industry.4 19. Seven of its top 10 brands have grown at double digit CAGR over past 4 years.5 27.5 Source: Industry/MOSL 65 .3 3. (Diltiazem. Torrent's Prescription ranking has improved across therapy segments Jan-07 CVS CNS Anti Diabetics Anti infectives GI 8 2 17 14 7 Jan-08 8 2 10 14 6 Jan-09 6 2 13 14 5 Jan-10 Oct-10 5 7 3 3 13 14 15 14 6 6 Source: Industry/MOSL Top 10 brands contribute 30% of the revenues Torrent Pharma's top 10 brands contribute ~30% to total revenue.9 15. Torrent Pharma ranks No3 in the CNS and No.8 24.3 17.8 17.0 5.6 6.5 5.0 18.6% respectively. the company has either maintained or improved its ranking in almost all the therapeutic areas it operates in.6 0.5 18.1 Avg Gr .Industry 17. Dilzem.2 5. Torrent Pharma's No1 brand.Torrent Pharma Market share in key therapies (%) 8. It ranks sixth in the GI segment.7 17.2 11.7 CAGR (%) 13.7 3. Over the last 4 years.0 19.0 18. (%) 5.Company 16. CNS and CVS.5 33.0 14.

2 32.0 9. revenue CAGR for all geographies has been lower than that of the industry average except for Metros.5 17.7 6.1 19.3 19.0 16.2 15.9 CY07 28.5 15.7 16. It has launched 38 new products annually (including line extensions) over the last 4 years.3 44.5 2.6 CY07 19. There has been significant improvement in revenue per new product launched Torrent's new product launch rate has been moderate compared to its peers in the industry.5 Rural 17.9 15.8 14.9 Class II to VI 13.1 37.6 Class I Tow ns 20.0 CY06 CY07 CY08 CY09 CY10 CY06 CY09 CY10 Geography-wise growth rates . The average revenue per new launch has risen substantially in the past four years from Rs32.7 6.7 9.8% in 2010.7 17.5 27.9 19.8 CY08 10.0 19.Industry (%) Metros Class I Tow ns Class II to VI Rural 26.6 Class II to VI 18.3 20.1 26.9 CY08 30.2% in 2006 to 12.4 16.6 32.4 44.5 12.8 Rural 12.5 38.5 17.8 29.2 27.6 28.7 16.0 35. suggesting a focus on these geographies.0 7.8 14. compared with 63% of the industry average.2 23.4 20.Torrent Pharma (%) Metros 18.8 14.6 16.6 19.7 -3.6 14.9 17. Distribution and reach: 6/10 Torrent Pharma derives 73% of its revenue from metros and class-I towns.9 Rural Geography-wise growth rates .6 Class I Tow ns 17.5 31.7 30.3 3. The contribution of rural areas to revenue has fallen over the past five years from 18.2 28.6 28.0 11.0 31. suggesting better penetration of launched brands. Introduction: 5/10 Torrent Pharma's pace of new product launches has been moderate compared with its peers in the industry.Industry (%) Metros 20. August 2011 66 .1 10. Geographical distribution of revenues .0 31.Torrent Pharma 3.6 15.6 14.4 32.7m in 2006 to Rs118m in 2010. In the past four years.Torrent Pharma (%) Metros Class I Tow ns Class II to VI 41.7 13.5 Geographical distribution of revenues .1 7. The revenue growth is driven by both existing products as well as new launches.0 CY09 CY10 CY07 CY08 CY09 CY10 Source: Industry/MOSL 4.

1 32.848 2. Over FY04-10.1 9. In 2004.285 35. Historically the company has outperformed industry in this segment with FY05-11 revenue CAGR of 19% versus that of 14% for the industry during the same period. However MR productivity is low compared to large peers Torrent Pharma has done a good job over the past six years with a improvement in workforce productivity.2 118.3m in 2010. However the MR productivity is still very low compared to large peers.0 38.904 6. We believe that. Torrent is likely to strengthen its presence in key therapeutic areas. CAGR and scale-up: 6/10 We expect 16% CAGR from Torrent Pharma's domestic formulations business led by a strong presence in the fastest growing chronic therapeutic segments.5m per MR. Torrent Pharma: Domestic formulations revenue ramp-up Revenues (INR m) Grow th (%) 11.444 3.9 CY09 CY10 Source: Industry/MOSL CY07 CY08 5.3% CAGR and its sales force expanded by just 10. improving its ranking in the industry.6 18. We believe the company will continue to outperform the industry and its peers over the foreseeable future.new launches No.0 14.3 5.389 Source: Company/MOSL 6.240 16.921 2. Torrent Pharma's domestic formulations business revenue posted 19. Torrent derived revenue of Rs1. which rose to Rs2.813 6.3 8.Torrent Pharma Torrent Pharma's .1 5.7 CY07 CY08 CY09 CY10 39 Torrent Pharma's growth compositions (%) New Launches Existing Brands 126 9.8 7.8 1.563 8.9 10. Of launches in last 2 yrs Avg sales per launch (INR m) 137. Improved MR productivity: 3/10 Torrent's topline growth is driven by both addition to the MR strength and improvement in the MR productivity.8 2.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 7.0 9.7% CAGR. August 2011 67 .1 6.3 15.254 5.9 9. implying significant productivity improvement of the workforce.3 73 43 57.

5 1.600 10.5 3.  Rupee appreciation vs US$ may have negative impact on earnings.7 11.3 Sales force addition CAGR (%) Productivity Improvement CAGR (%) 1. Risks & concerns  Delay in getting regulatory approvals for the products  Worsening of pricing environment in key markets like Germany and US.9 2004 2010 Torrent Industry Source: Company/Industry/MOSL 7.  Continued losses at Russian subsidiaries will impact overall profits. Increasing presence in other emerging markets  Increasing presence in US market with healthy product pipeline  Strong chemistry skills and backward integrated low-cost operations.Torrent Pharma Torrent: Salesforce productivity No.  Improving profitability of international subsidiaries. Key news flows/triggers  Ramp up in US revenue in FY12-13  Begining of supplies to AstraZeneca  Improvement in profitability of international business Impact assessment Expect the international business to post 15% CAGR over FY11-13 led mainly by US and CRAMS supplies to AstraZeneca  We expect the international business to record 16% CAGR over FY11-13 excluding low-competition and Para-IV products in the US. Non-domestic business snapshot: 6/10 Positives  Strong presence in emerging markets like Brazil and RoW markets.8 1.  Option values include upsides from future inorganic initiatives.959 7. of MRs Revenue per MR (INR m) 2.  August 2011 68 .

8 1. 16.2 28.7x FY12E and 12. and its valuation gap vis-à-vis frontline pharmaceutical companies should fall.0 3.704 17. Earnings growth and stock attractiveness: 22/30 Over the past five years Torrent posted earnings CAGR of 34% and CAGR of capital employed in the business was 17%.0 1. going forward. The stock trades at 14. an upside of 26%.0 RoE (%) 36.306 YoY Growth (%) 20.145 1.0 16.9 Latin America 2.0 18.131 39.431 2.7 15.011 1.245 2.096 13.5 1.986 1.0 10.2 29.7 16.1 28.5 1.573 2.983 19.4 33 -52.864 18.1 22.702 16.9 Peak(x) Min(x) 29.220 15.1 24.8 14.0 17.8 29.0 12.7 61.292 5.4 15.1 6 3.9 3.285 16.254 YoY Growth (%) 7.9 0 Dec-05 Jan-08 May-07 Aug-06 Dec-10 Mar-05 Jul-09 Mar-10 Oct-08 Aug-11 Torrent Pharma one year forward P/E RoCE (%) 24 18 P/E (x) Avg(x) 21.845 16.0 19.547 RoW 885 1.9 15.2 9.0 14.640 2.7 24.0 10.5% in FY05 to 24.329 YoY Growth (%) 20.006 Russia/CIS 658 391 Europe (ex-Germany) 1.451 28.596 29.0 24. turnaround of international operations and Torrent's strong positioning in the domestic formulations segment.469 1.566 3.9 25. Torrent is likely to post earnings of 22% CAGR over FY11-13.563 11.9 15.331 15.157 YoY Growth (%) 37.135 3.9 FY11-13 CAGR (%) 9.601 1. with RoCE increasing from 14.240 7.141 US 278 909 CRAMS 1.276 1.6 10.5 Source: Company/MOSL FY12E FY13E EBITDA Contribution Torrent Pharma Non-DF EBITDA 30% DF EBITDA 70% Domestic formulation 6.3 27.5 16.0 525 577 -0.643 13. Maintain Buy with a target price of INR762 (16x FY13E EPS).817 15.0 36 40 10.8 21.3 International formulation7. in line with strong operating performance.040 Income from op.6 2.8 8-9. We believe Torrent's superior financial performance will drive re-rating.3 16.317 12.163 Germany (Heumann) 2.4 4.970 9.429 1. Torrent should trade at a premium to most mid-cap pharmaceutical companies.4x FY13E earnings.093 2.223 4.045 47.1% in FY11.6 15.5 Other operating income 441 710 YoY Growth (%) 3.Torrent Pharma Sales mix (INR m) FY09 FY10 FY11 8.7 Net Sales 15.1 15.6 1.421 14.2 16.849 YoY Growth (%) 7. We believe current valuations do not reflect the improvement in business profitability.265 16.519 583 1.7 12 FY09 FY10 FY11 FY12E FY13E August 2011 69 .389 15.500 15. Torrent consistently improved its profitability. It is likely to sustain high return ratios despite large capex and growing cash on its books.0 25.4 16.4 13.4 11. Torrent Pharma RoE & RoCE 42.5 Others 53 69 YoY Growth (%) 64.

Torrent Pharma Financials and valuations: Torrent Pharma Income Statement Y/E March 2010 Net Revenues 19.249 5.5 20.413 3.155 12.041 1.9 2.158 745 0 745 18.4 3.5 Depreciation 661 EBIT 3.033 8.7 13.029 Ratios Y/E March Basic (INR) EPS (INR) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) EBITDA Margins (%) Net Profit Margins (%) RoE RoCE Working Capital Ratios Asset Turnover (x) Fixed Asset Turnover (x) Debtor (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity 2010 31.7 25.487 -17 -1.2 7.1 16.105 2.6 56 1.500 0 -2.944 % of Sales 78.500 1.490 6.7 0.9 39.265 16.250 9.216 1.6 8.0 3.856 7.9 16.0 4.887 8. P/L before Tax Interest/Dividends Recd.224 480 5.312 Adj PAT 2.938 -2.378 1.702 2.3 120.280 6.4 12.524 9.151 16.721 22.427 720 5 725 21.Rec.982 3. 3.6 3.3 29.5 23.7 0.6 61.0 1.883 4. Liability & Prov.8 Total Expenditure 14.200 1.9 28.1 1.788 2.7 11.7 28.801 10.069 153 -884 -611 4.310 499 5.7 35.199 172 109 4.1 8.295 8.583 2.506 5.466 121 81 3.005 0 4.932 172 153 4.048 3.913 0 4.236 2.927 7.2 28.173 81. Account Payables Provisions Net Current Assets Appl.151 109 -745 -598 3.0 25.4 952 4./(Inc.441 (INR Million) 2012E 423 12.3 29.907 7.392 2013E 29.4 13.3 3.496 4.726 0 4.3 24. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -1.955 480 5.3 3.0 4.500 1.385 3.137 4.755 16.1 2012E 40.9 9.033 2011 423 9.2 24.069 16.106 8.000 -16 -172 -683 0 -870 1.685 4.883 August 2011 70 .140 2.702 (INR Million) 2012E 25.6 1.224 14.096 127 -717 349 3.883 1.460 21.8 24.885 5.460 15.726 -2.4 1.3 57 1.966 22.7 1.8 9. Deprn.721 16.460 17.384 9.1 Reported PAT 2.913 884 0 884 18.412 11.6 55 1.435 Int.5 27.479 1. of Funds E: MOSt Estimates 2010 423 7.1 191.4 15.6 153.2 9.045 8.794 4.657 -48 -2. incl EO Exp.432 9.4 626 3.2 2.390 1. 127 PBT before EO Expense 3.129 2.427 6.000 0 -2.5 14.856 2013E 6.9 5.6 1.1 13.680 2011 22.504 398 -251 -592 44 -401 1.440 16.9 18.1 29.596 15.990 5.068 4.0 20.6 4.944 Current Tax 705 Deferred Tax -74 Tax 632 Tax Rate (%) 19.718 5.452 1.300 3.839 2.178 480 5.346 5.817 16.884 7.6 18. Direct Taxes Paid (Inc)/Dec in WC CF from Operations 2010 4.500 0 -172 -806 0 -977 1.607 3.1 20.1 36.8 1.105 EO Expense / (Income) 368 CF from Oper.404 4.7 0.005 -2.4 3.155 2013E 423 15.6 2011 31.6 1.343 7.788 5.092 14.) 368 PBT after EO Expense 2.1 51. and Finance Charges 251 Other Income .0 2013E 47.427 0 3.3 59 2.4 1.7 14.312 Extra Ordinary Exp.488 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Debt Interest Paid Dividend Paid Others CF from Fin.111 14.782 11.0 18.5 0.029 4.6 6.137 -21 4.788 (INR Million) 2012E 5.856 2.748 79. Net Fixed Assets Capital WIP Investments Curr.917 -21 3.378 14.4 3.106 19.856 2011 4. Assets Inventory Account Receivables Cash and Bank Balance Loans & Advances Curr.411 1.090 5.1 98.676 4.721 19.531 12.1 Balance Sheet Y/E March Equity Share Capital Total Reserves Net Worth Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum.098 1.5 EBITDA 4.040 Change (%) 16.096 Margin (%) 18.092 81 -744 577 4.705 513 -121 -787 -1 -395 905 3.3 12.4 9.6 14.441 10.4 Cash Flow Statement Y/E March Oper.4 12.445 79.

Domestic Formulations | New Peaks This page is left blank intentionally August 2011 71 .

GSK is among the laggards when it comes to launch of new products. Ramp-up in domestic formulations revenues is driven largely by existing products.5 P/E (x) 31.586 59.5 4.9 21. dermatology.8 24. D: Distribution & reach 7/10 I: Introductions 3/10 Derives 60% of the revenues from Metro and Tier I cities.4 27. It has launched 5 new products (including line extensions) annually over the last 4 years. (INR b) M. (%) 12.6. vitamins and pain managements segment while ranks no.9 20.567 7.5 89.6 6.049 5. It also enjoys leadership position in the Dermatology segment.814 6. (%) M.708 21.7 30.921 5. no.8 5. Enjoys strong brand equity in its some of the largest therapeutic segments in the industry.740 26.3 in Pain management and Vitamins segments and no5 in AI and respiratory segments. Stock info Equity Shares (m) 52-Week Range (INR) 1.6 15.475/1.2 12.5 8.Domestic Formulations | New Peaks MEDICINES CAPSULE GSK Pharma 4/10 E: Equity with doctors MEDICINES Score 64/100 GLXO IN Of patent and parent M: Mix CMP: INR2.Cap. The company is in the process of expanding its presence in the life-style segment led by new launches from the parent's portfolio. It ranks no.1 P/BV (x) 9.6 77. Its parent has one of the richest product and R&D pipelines among Pharma companies worldwide. pain management and Vitamins.0 RoE (%) 28.330 Buy 9/10 GSK derives majority of its revenue from the acute therapeutic segments and has very little presence in the chronic segments.116 23. GSK Pharma is the market leader in Dermatology. launch of branded generics and in-licensing.12 Rel. Perf. GSK derives 95% of its revenues from acute therapeutic segments with dominant presence in Anti-infcetives.4 RoCE (%) 43. (USD b) 84. with a strong presence in segments like dermatology.1 31. respiratory and vaccines.9 15.2 Background GSK Pharma is the 4th largest formulations company in India.1 in dermatology segment.6 68.6 EPS Gr.5 EV/ EV/ Sales EBITDA 7.7 8.3 49. It has field force of 3000MRs which is on a lower side compared to other Indian companies of similar size. GSK has launched very few new products over the last 4 years compared to its peers. Based on prescription ranking.7 2.8 46.3 33. August 2011 72 .4 in respiratory segment.850 5/7/22 182.Cap. Contribution of Tier II and rural area to total revenues has remained stagnant over the last 5 years.0 Financial & valuation summary Year End 12/09A 12/10A 12/11E 12/12E Net Sales PAT EPS (INR m) (INR m) (INR) 18.2 17.155 TP: INR2.0 44.

MR growth was at 5. At this level the productivity is amongst the best in the industry. Hasit Joshipura (MD).8x CY11E and 24. CEO C: CAGR and scale-up 6/10 I: Improvement in productivity 9/10 GSK has significantly underperformed the industry with revenue CAGR of 8.1% for CY04-10 The company has reported an improvement in workforce productivity over CY04-10. N: Non-domestic business NA NA E: Earnings growth 6/10 Expect overall topline CAGR of 13% for CY10-12 leading to EPS CAGR of 14.GSK Pharma CEO Profile GSK Pharma is a 50% subsidiary of GSK Plc (UK) and is being currently managed by Dr.1% over CY04-10 versus industry revenue CAGR of 14.850 1.1x CY12E Maintain Buy with TP of INR 2.600 2. S: Stock Attractiveness One of the most conservative managements amongst Indian pharmaceutical companies Return ratios are amongst the best in the industry with ROCE in excess of 40% and RoEs in excess of 30%. GSK enjoys one of the highest MR productivity in the industry with annual revenue per MR at INR7. mainly due to high base and intensifying competition in acute segment. Maintaining a leading presence in India and sustaining one of the highest profitability and return ratios in the industry despite miniscule presence in the high-growth life-style segments is the key achievement.7m.600 Aug-10 Nov-10 Feb-11 May -11 Sens ex .330 (26x CY12E EPS) Stock performance (1 year) GSK Pharma 2. GSK is currently valued at 27.8% over the same period.350 2.Rebas ed 14/20 Aug-11 August 2011 73 . The company has gradually lost its market share and slipped through the ranking.100 1.2% " EPS growth is higher than topline growth mainly due to expanding EBITDA margins.9% compared to revenue growth of 8. We expect it to grow at 13-14% CAGR over CY1012 which is slightly lower than the industry average.

Vitamins.26% in 2010 due to low growth stemming from very few new launches and stiffer competition. Pain Management.2 4. GSK's MR productivity is the best among the leading companies.2 4.6 9. These launches are expected to bring long-term benefits. GSK derives 95% of its revenue from acute therapeutic segments. However. We believe GSK's growth trajectory will increase from CY13 as it gets meaningful revenue from new launches. Mix: 4/10 Acute segments account for most of GSK's sales The top seven therapeutic segments.3 19. Hormones and GI. It leads the industry in profitability despite its meager presence in highly profitable chronic segments.23% in 2006 to 4. Dermatology. Over the past 10 years the contribution of Dermatology and Pain Management rose from lower single digits to double digits while that of Vitamins and Respiratory segments fell from 50% to 18.4%. Market share and growth Others 15% GI 7% AI 21% Dermatol ogy/Ster oids 2% Pain 5% GI 6% Others 15% AI 25% Dermatol ogy/Ster oids 18% Res pirat ory 24% VMN 26% Res pirat ory 10% VMN 15% Pain 11% March 2011 Gynaec 3% Anti-Parasitic 3% GI 7% CVS 3% Others 6% AI 21% Mkt Share (%) Grow th (%) 4. GSK has maintained its strong position despite few new launches. Respiratory. GSK was the largest pharma MNC in India. contribute ~86% to GSK's domestic formulations revenue.3 5.5 Hormones 8% Respiratory 9% VMN 10% Pain 11% Dermatology 19% 6.3 Source: Company/Industry/MOSL 2006 2007 2008 2009 2010 August 2011 74 .1% over the past six years against 14% CAGR for industry. GSK's business posted CAGR of 8.9 3. EBITDA Contribution Of patent and parent Solid play on new patent regime GSK Pharma is among the best performing MNCs in the domestic formulation space with its strong parentage and brand equity among doctors.GSK Pharma India formulations snapshot Second largest Pharma MNC in India. DF EBITDA 100% GSK Pharma: Therapeutic mix CY 2000 CY 2004 Among the leading players in the industry GSK has maintained leadership in the industry though its ranking has slipped from No1 to No4 over the past few years. Before Abbott took over Piramal Healthcare's domestic formulation business. AI.8 2.9 4. We believe GSK is one of the best plays on the IPR regime in India with aggressive plans to launch new products in the high-growth lifestyle segments. 1. Its market share fell from 5.

4 18.3 7.6 16.7 13.0 14. It shows GSK's brand building ability and its strong brand recall among physicians. GSK ranks first in the Dermatology. Prescription ranking of GSK Jan-07 Derma Vit Pain Mgmt Respiratory Gynaec Anti-infectives GI CVS 1 1 1 3 1 9 10 16 Jan-08 1 1 1 3 4 9 9 18 Jan-09 1 1 2 3 6 9 13 18 Jan-10 Oct-10 1 1 1 1 2 1 3 4 6 6 10 10 15 15 19 20 Source: Industry/MOSL Top 10 brands contribute 45% to GSK revenue GSK's top 10 brands contribute ~45% to its total revenue. The brand concentration is among the highest in the industry.4% and 7.1 AI Respiratory Pain/Analgesic VMN Dermatology AI Res piratory Pain/Analgesic VMN Dermatology * Average growth over 2009-2010 Source: Industry/MOSL GSK has strong brand equity among physicians.1 6.7% and 7% respectively. It ranks fifth in two of the industry's largest therapeutic segments. with market share of 6% and 5. Equity with doctors: 9/10 GSK leads the industry in AI. ranks fifth in the industry and posted 18% growth over the past four years. the company lagged the industry growth rate in almost all therapeutic segments due to very few new launches.2 Av g Gr . Pain Management GSK ranks first in the Dermatology space in India with market share of 20% and ranks third in the Pain Management and Vitamins segments with market share of 6.3% respectively. August 2011 75 . Its No1 brand. AI and Respiratory.4 7. which is visible from its market share and prescriptions rankings.4%. GSK ranks fourth in the Respiratory segment and sixth in the Gynecology segment.Company 16. Vitamins and Pain Management segments with prescription market share of 10.3 GSK Pharma: Growth composition (%) (2010) Avg Gr . Eight of the 10 brands posted double-digit CAGR over the past four years.4 6 5.8 16. GSK's top 10 brands feature among the industry's top 100 brands.GSK Pharma 2.1% respectively. 8. However over the past two years.4 17.9 9.Industry 16. Dermatology. GSK Pharma: Market share in key therapies (%) 20. AI). Augmentin (Amoxycillin.

0 31.8 15.5 RURAL 17.7 8.8 6.7 20.5 12.3 7.4 19.2 1.7 7. 9 26.+Chinoform.7 16.0 Geographical distribution of revenues: Industry (%) METROS 20.4 CLASS II TO VI 20.2 6.7 18. Over the past four years revenue CAGR for all geographies has lagged the industry average.7 17.6 CY09 28.6 CY06 28. Betnovate-n Betameth.2 23.4 32.9 18.1 32. Betnesol Betamethasone injectables CAGR through 2006-10 12.4 20. GSK: Geographical distribution of revenues (%) METROS 21.3 19. Comb.6 32.4 30.0 19.6 15.0 CY09 CY10 GSK: Geography-wise growth rates (%) METROS CLASS II TO VI CLASS I TOWNS RURAL Industry: Geography-wise growth rates (%) METROS CLASS II TO VI CLASS I TOWNS RURAL 26.7 13.0 31.2 17.704 798 1.4 32.5 13.4 CY06 27.0 2.5 5.0 31.8 CY09 CY10 17.0 13.3 10. Neosporin Antibio.7 17.032 1.GSK Pharma Top 10 brands Brand Drug Product Launch Sales (INR m) 1986 1994 1991 1995 1989 2000 1996 1996 1996 1971 1.7 17.5 20.9 CY07 28.6 27.7 29.7 9.+Neom. GSK's CY10 growth in all geographies was in higher double digits.5 10.5 15.9 CY08 30.5 CY07 CY08 CY09 CY10 Source: Industry/MOSL August 2011 76 .6 14.0 11.101 813 638 633 631 630 822 YoY Gr (%) CAGR (%) Zinetac Ranitidine Augmentin Amoxy.2 CY10 27.0 31. & Clav.6 CLASS II TO VI 18.0 16. However.1 19.2 32.7 22.3 RURAL 19.7 CLASS I TOWNS 22.7 17.5 31.2 Source: Industry/MOSL 3.5 CY07 1.6 CY08 -1.6 CLASS I TOWNS 20.3 -0.5 17.5 11.1 7.9 19.3 0.0 27. Distribution and reach: 7/10 GSK derives 60% of its revenue from metros and Class-I towns compared with an industry average of 63%.8 14.6 31.6 19.0 23.3 9.4 13. 6 14.6 CY08 26.3 20.9 19. Ceftum Cefuroxime Calpol Paracetamol Phexin Cephalexin Eltroxin Levothyroxine Betnovate-c Betameth.9 19.3 12.0 CY07 25.7 20.

2 0. which rose to INR7. GSK derived INR6. In 2004.4 7. This will be driven by expanding therapeutic and geographic coverage and with incremental contribution from new launches.7% over CY04-10 and its sales force posted CAGR of 5. Of launches in last 2 yrs Av g s ales per launc h (INR m) 124.4 81.8 0. GSK launched very few new products-22 new products including line extensions-compared with its peers. Improvement in MR productivity: 9/10 GSK's sales force productivity increases GSK's revenue posted CAGR of 8.3 17.8 CY08 1.9% over CY04-10. August 2011 77 .7m in CY10. GSK's top-line growth will be led by a focus on priority products. GSK's current MR productivity is arguably one of the best in the industry. The average revenue per new launch has improved marginaly from been virtually stagnant from INR71m in CY07 to INR81m in CY10. We believe the growth trajectory will improve in the long term as new launches contribute meaningfully to the top-line. implying improvement in salesforce productivity.8 CY10 Source: Industry/MOSL 5. which will sustain double-digit growth.5 GSK Pharma: Growth composition (%) New Launches Ex is ting Brands 81. GSK Pharma: New launches No.7 CY07 2.GSK Pharma 4. 6. which reflects GSK's ability to leverage existing brands. CAGR and scale up: 6/10 We expect 13-14% CAGR for GSK's domestic formulations business over the next few years.9 CY09 1. Introductions: 3/10 Existing products lead revenue growth over the past four years Over the past four years.4 13 CY07 15 CY08 23 CY09 36 CY10 2. Topline growth over the past four years has been almost entirely driven by existing products.5m revenue per MR.6 71.

GSK RoE & RoCE (%) RoE 44. Maintain Buy with a target price of INR2.5 5.8 RoCE 46.5 (up 12.0 28. of MRs Revenue per MR (INR m) 7.8 24.4 31.500 2010 1.5 1. GSK deserves premium valuations due to strong parentage (giving access to a large product pipeline).8x CY11E and 24. we expect this growth to lead to sustainable double-digit earnings growth and RoE of ~30%.6 Peak(x) Min(x) 43.3 2008 2009 2010 2011E 2012E August 2011 Aug-11 78 . brand-building ability and likely positioning in the post patent era.1x CY12E earnings.5%).0 44.9 Indus try Source: Company/Industry/MOSL 8-9. Earnings growth and stock attractiveness: 20/30 We believe GSK is one of the best plays on the IPR regime in India with aggressive plans to launch new products in the high growth lifestyle segments. leading to high RoCE of over 45%.9%) and CY12E EPS of INR89.775 2004 2. The stock is valued at 27.5 GSK one year forward P/E 34 28 P/E (x ) Av g(x ) 30.9 11. These launches are expected to bring it long-term benefits. Given the high profitability of operations.1 22 16 10 Mar-07 F eb-08 F eb-09 F eb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 F eb-11 14.1 33.7 29. as new launches contribute meaningfully to the top-line. We expect GSK to record CY11E EPS of INR77.7 Sales forc e addition CAGR (%) Produc tivity Improv ement CAGR (%) 6.6 (up 15.5 GSK 1. GSK is one of the very few companies with the ability to drive reasonable growth without major capital requirement.1 30. We believe GSK is likely to sustain double-digit topline growth over the next few years.GSK Pharma GSK Pharma: Salesforce productivity No. We believe this growth trajectory will improve after CY13.3 49.330 (26x CY11E).2 23. This growth is likely to be funded through miniscule capex and negative net working capital.

689 0 22.223 2.3 46.152 -1.2 2.8 2012E 26.7 6.5 2012E 89.784 2.4 5.350 0 -2 -4 -3.250 -1.525 17.985 -2.739 7.859 4.481 E: MOSL Estimates ^ .921 13.755 Add: Beginning Balance 9.900 16.468 3. (inc)/dec in FA (Pur)/Sale of Investments CF from investments Change in Net Worth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. and Finance Charges Other Income .481 1.0 0.656 214 22.297 1.9 2010 68.392 5. of Funds 17.148 447 2010 847 18.567 4.9 27.530 537 16.784 2.726 1.223 16.378 12.528 1. 1.961 3.729 -2.923 8.274 19.641 32.8 20.1 23.9 17.049 -74 5.3 231 0 2.859 3.9 19.1 44.996 3.184 2.445 17 19.378 1.095 1.5 79. Liability & Prov.4 10 49 -47 17.969 -3.708 12.187 1.115 17 20.0 34. Deprn.976 -3.9 247.689 20.8 33.982 2010 7.2 2.689 4.859 33.6 70.234 11. Account Payables Provisions Net Current Assets Deferred Tax Assets 2009 847 16.194 7.6 61.951 7.0 0.586 0 7.GSK Pharma Financials and valuations: GSK Pharma Income Statement Y/E December Net Sales Change (%) Materials Consumed Personnel Expenses Other Expenses Total Expenditure EBITDA Change (%) Margin (%) Depreciation Int.162 6.360 E: MOSL Estimates.585 2.772 4.546 13.5 207.726 19.4 6.789 7.0 5.814 177 5.187 2012E 9.5 7.181 9.5 Balance Sheet Y/E December Equity Share Capital Reserves Capital Reserve Net Worth Loans Capital Employed Gross Block Less: Accum.808 159 1.7 30.0 0.Rec.2 Ratios Y/E December Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio Debt/Equity 2009 59.409 3.4 30.346 2.641 -720 7.0 164 4 1.036 4.815 470 19.979 3.483 2.234 -3.922 2.708 12.4 8.829 -4.0 8.994 (INR Million) 2011E 7.699 -166 216 50 0 -3 -6 -2. Assets Inventory Account Receivables Cash and Bank Balance Others Curr.4 10 49 -50 20.4 8.979 2012E 847 21.481 1.0 73.969 9.6 27.376 1.518 -726 -17.932 3.5 202 0 1.096 0 7.6 92.770 2.3 24.7 6.7 228.346 Appl.5 28.979 0 20.292 -184 5.218 EO expense CF frm Op.842 4.116 12.226 3.206 Direct Taxes Paid -2.7 34.3 35.660 2.0 30.4 9. incl EO exp.646 19.862 -18.146 12.123 12.204 -17.586 15.523 5.591 54 17.4 2010 21.687 (Inc)/Dec in WC 1.1 10 49 -45 0.646 2.0 40. PBT & EO Expense Tax Tax Rate (%) Adj PAT EO Expense (net of tax) Reported PAT Change (%) Margin (%) 2009 18. Net Fixed Assets Capital WIP Investments Curr .9 7.938 564 22.826 17 22.0 76.0 5.129 21 0 0 -4.9 1.931 53 -52 0 -3.016 564 (INR Million) 2011E 847 20.951 1.187 1.876 177 5.909 21.351 6.163 15.4 7.604 24.206 7.0 Cash Flow Statement Y/E December 2009 Oper.728 17 17. Activity -74 6.2 26.3 33.830 14.Standalone results August 2011 79 .360 3.536 33.784 4.740 12.6 21.308 52 19.065 16.717 8.567 1.9 176 6 1.4 31.184 2.673 2.3 267.167 3.094 3.477 -2.748 -1.726 Closing Balance 16.9 8 49 -60 18.580 727 1. Profit/(Loss) bef.0 58.8 27.546 Interest/Dividends Recd.718 3.9 60.4 49.487 214 20.535 5.7 (INR Million) 2011E 23.157 665 1.096 -400 -1.964 928 214 1.7 50.834 3.8 31.212 4.863 -3.566 6.152 32.560 13.5 9.477 8.852 564 20.089 87 1.144 2.892 1.8 28.153 CF from Operations 6.7 43. ^Standalone results Inc/Dec of Cash 7.5 2011E 77.698 9.976 -3 5. Tax 6.637 15.0 66.

1 with prescription market share of 12% and 4. CVS and Anti-diabetic segments.9 17. Over the past decade it has also expanded its presence to US and 40 other markets.161 17.7 18.8% respectively. it has either maintained or improved its prescription ranking in the therapeutic areas where it is present.2 26.8 16.2 6.5 22. in last 4 year.5 20.6. Sun Pharma ranks No.Cap. It derives 61% of its revenues from lifestyle chronic segments Sun is one of the very few companies which has focussed on the life-style from its inception. D: Distribution & reach 8/10 I: Introductions 6/10 Derives 73% of the revenues from Metro and Tier I cities.601 14. (%) 47. Further.600 Sun Pharma's new product launch rate has been moderate compared to its peers in the industry.4 27.952 13. It has launched 31 new products annually (including line extensions) over the last 4 years. Perf.5 20.6 5. Further.7 22.8 22.4 3.5 17.1 RoE (%) 16.9 * Including Para-IV/one-off upsides Background Sun Pharma is one of the largest Indian companies in the domestic formulation space with significant presence and leadership in fast growing chronic therapeutic areas like CVS.Cap.5 26. It offers the best play on fast growing and most lucrative lifestyle therapeutic segments in India.4 Financial & valuation summary Year End 03/11A 03/11A* 03/12E Net Sales PAT EPS (INR m) (INR m) (INR) 52. (USD b) 1. CVS and Diabetes.035. CNS etc.5 10.976 21.4 03/13E 75. August 2011 80 .8 34. The contribution of rural areas to revenues has come down over the last 5 years.041 18. Diabetes. In CNS and Gynaecology segments.7 P/BV (x) 5.5 P/E (x) 34.6 17.066 57. Stock info Equity Shares (m) 52-Week Range (INR) 1.2 4.626 20.8% and 7. Gynaecology. revenue CAGR for all geographies has been in-line or better than industry average It has field force strength of 2. The revenue growth is driven by both existing products as well as new launches.3 EPS Gr. (INR b) M.12 Rel. Key markets include India and US. Sun pharma enjoys strong brand equity in CNS.6 538/341 2/22/41 480.2% respectively while in CVS and Antidiabetics segment it ranks no 2 with prescription market share of 6.9 EV/ EV/ Sales EBITDA 7. (%) M.9 20.Domestic Formulations | New Peaks MEDICINES CAPSULE Sun Pharma CMP: INR464 TP: INR524 MEDICINES Score 77/100 SUNP IN The Sun shines bright ! M: Mix 7/10 Neutral 9/10 E: Equity with doctors Sun is the best play on the high-growth life-style segments of CNS.2 RoCE (%) 22.214 65.

Sun ranks the best in the industry in terms of MR productivity.2% for FY11-13 leading to EPS CAGR of 24% Earnings growth will be driven by the Taro acquisition. sustained momentum in the India formulations business and gradual improvement in Caraco S: Stock Attractiveness Focused and cautious approach to international expansion coupled with highly profitable domestic business has ensured good return ratios which. CEO C: CAGR and scale-up 9/10 I: Improvement in productivity 9/10 Sun Pharma has significantly outperformed the industry with revenue CAGR of 23% over FY05-11.5% CAGR over FY11-13 outperforming the industry led by strong presence in fast growing chronic therapeutic areas like CVS. strong generic pipeline and monetization of some of the niche. The growth is achieved largely because of favorable therapeutic mix. CNS and Antidiabetics. Revenue per MR has improved significantly from INR3.2m in 2004 to INR7. He founded Sun Pharma in 1982 and has extensive experience in the pharmaceutical industry. Expect overall topline CAGR of 15.Sun Pharma CEO Profile Dilip S. Sun is currently valued at 26. Shanghvi is a graduate in commerce from Kolkata University.Rebased Aug-11 August 2011 81 . N: Non-domestic business 7/10 E: Earnings growth 9/10 Remain positive on Sun's US business given its strong chemistry skills.2% CAGR for FY11-13 mainly led by the Taro acquisition.8x FY12E and 22. Focused approach to business and sustaining superior profitability and growth on higher base are his key achievements.8m in 2010.2x FY13E consolidated earnings We maintain Neutral with TP of INR524 (25x FY13E EPS) excluding Para-IV upsides Stock performance (1 year) Sun Pharma 540 480 420 360 300 Aug-10 Nov-10 Feb-11 May-11 13/20 Sensex . We expect it to grow domestic formulations at 18. The current field force productivity is one of the best in the industry. The company has scaled up the business rapidly albeit on a low base. improvement in brand equity and increase in field force productivity. Core international business (excluding one-offs in US) to record 34% CAGR Option values includes upsides from one-off opportunities in US. low-competition opportunities Expect international business to record 15. and improvement in brand equity. partly muted due to significant cash of USD1b.

5 18.21% in 2006.5 13. CVS. which dominate the company's revenue mix.3 3.21 3. CNS.4 Strong brand equity among specialists.2% CAGR over the past six years against 14% CAGR for the industry. which grew from 3. The company posted 23. CNS.9 17. CNS. August 2011 82 . Sun Pharma ranks No1 in the CNS and CVS segments with a value market share of 20. Sun Pharma's sizable presence on the chronic therapy segments makes it the most attractive play in the domestic formulations business. CVS. Sun Pharma is the largest company in the chronic segments. leader in the CVS. Equity with doctors: 9/10 Mkt Share (%) Grow th (%) 23.2 3. CNS.66% market share. anti-diabetes dominate sales Sun Pharma derives 61% of its revenue from lifestyle therapeutic segments. It ranks fourth in the anti-diabetes segment with market share of 7. The top four therapeutic segments including CNS. It is the market leader in two of the fastest growing therapy segments.66 3.7% and 5. profits The domestic formulations business contributes 42% to Sun Pharma's revenue. Except in the anti-diabetes segment. EBITDA Contribution The Sun shines bright ! But dazzling valuation merits caution Sun Pharma is one of the largest Indian companies in the domestic formulations space with a significant presence and leadership in fast growing chronic therapeutic areas like CVS. CNS and CVS. in which it commands 3. Sun Pharma Others 23% Respirat ory 6% CNS 32% CNS 27% Pain 6% Gynaec 7% Gynaeco GI logy 6% 2% CVS 21% Pain 10% Diabetes 10% GI 12% CVS 21% Source: Company/Industry/MOSL 2.7 17. a contribution that is the highest among leading Indian generic companies. Sun Pharma is arguably the best company in the industry in terms of improvement in workforce productivity and the best play on fast growing and the lucrative lifestyle therapeutic segments. diabetes and CNS. Diabetes dominates the therapy mix FY01 FY11 Respirat Others Ophthalm ory 4% 8% ology 5% DF EBITDA 72% The largest player in the chronic therapeutic segment Sun Pharma is one of the largest players in the industry and has grown its market share over the years due to significant presence in fast growing chronic therapeutic areas.7% and 7. CVS and anti-diabetes. Mix: 7/10 Sun Pharm a Non-DF EBITDA 28% Lifestyle segments like CVS. The segment is the most profitable for Sun Pharma and contributed almost 72% to EBITDA in FY11.1% respectively. Sun Pharma out-performed industry growth and increased its market share and brand equity in its major segments. GI and anti-diabetes segments Sun Pharma has been a dominant player in three of the industry's fastest growing therapeutic segments. Over the years. in all other segments the average growth rate over the past two years has been higher than the industry's.58 2006 2007 2008 2009 2010 3.8% and sixth in the GI and gynecology segments with market share of 4. 1.5% respectively.Sun Pharma India formulations snapshot Domestic formulations major contributor to revenue. GI and anti-diabetes contribute ~70% to Sun Pharma's domestic formulations revenue.

1 Gynaecology 18.2 11.3 10.Sun Pharma Market share in key therapies (%) 20. Sun Pharma's prescription ranking Jan-07 CNS Gynaec CVS Anti-diabetic GI Respiratory 1 5 2 2 15 23 Jan-08 1 2 2 2 14 25 Jan-09 1 2 2 2 15 23 Jan-10 Oct-10 1 1 1 1 2 2 2 2 12 12 22 22 Source: Industry/MOSL Top 10 brands contribute 20% of the revenues Sun Pharma's top 10 brands contribute ~20% to total revenue.2 17.8 5.Industry 7. GI) ranks 87th in the industry and has posted revenue CAGR of 19% over the past four years.3 13. Sun Pharma's No1 brand.9 CVS GI Gynaecology CNS Anti Diabetic 23. Pantocid.6 24.Company Avg Gr .1 22.2 20.6 2.3 11.5 25. In the CNS and gynaecology segments.7 Growth comparison (%) (2010) Avg Gr .1 4.7 25.3 Anti Diabetic CVS * Average growth over 2009-2010 Source: Industry/MOSL Sun Pharma has strong brand equity in the CNS.8% and 7.2 17. gynaecology. which shows low brand concentration compared with other leading companies.7 7.0 Source: Industry/MOSL 83 .8 20.5 11. CVS and anti-diabetes segments. (%) CAGR (%) 20. This is the only company among the companies covered in this report to post double-digit revenue CAGR in all its top 10 brands.+ Domperidone Glimepiride+Metformin Citocholine Losartan Sodium Valproate Clopidogrel Product Category Gastro-intestinal Anti-diabetics Gynaecology CVS Gastro-intestinal Anti-diabetics CVS CNS CVS Product Launch 1999 2000 2000 2000 2003 2002 2004 1998 1999 2001 Sales (INR m) 479 457 430 400 355 287 253 243 234 230 YoY Gr. Over the past few years Sun Pharma has either maintained or improved its prescription ranking in the therapeutic areas in which it is present.9 17.9 12.2 19.7 20.8 18.9 14.7 CNS 21.7 17.7 8.3 16. Top 10 brands of the company Brand Pantocid Glucored Susten Aztor Pantocid-D Gemer Strocit Repace Encorate Chrono Clopilet August 2011 Drug Pantoprazole Solids Glibenclamide + Metformin Progesterone Atorvastatin Pantopr.2 respectively while in the CVS and anti-diabetes segments it ranks second and its prescription market share is 6.3 32. Sun Pharma ranks No1 with a prescription market share of 12% and 4.8% respectively. (Pantoprazole.4 28. Seven of its brands feature among the top 300 brands of the industry. in terms of the number of prescriptions written in the segments.1 GI 18.

In the past four years. Introductions: 6/10 Sun Pharma's new product launches have been moderate compared with its peers in the industry.6 14.8 38.Industry (%) Source: Industry/MOSL 4.2 15.Industry (%) 37. Distribution and reach: 8/10 Sun Pharma derives 73% of its revenue from metros and class-I towns. August 2011 84 . suggesting better penetration of launched brands. It launched 31 new products each year (including line extensions) over the past four years.3 33.Sun Pharma 3.1 6. The average revenue per new launch has risen substantially in the past four years from INR112m in 2006 to INR163m in 2010.2 32.1 38.1 14.7 13.0 16.2 9. Revenue growth was driven by existing products and new launches.4 13.7 14.2 25.2 Geographical distribution of revenues . revenue CAGR for all geographies has been in line/better than the than that of the industry average.8 Rural 11.3 34.6 Geography-wise growth rates . Geographical distribution of revenues .6 12.5 CY06 CY07 CY08 CY09 CY10 Geography-wise growth rates .9 15.6 14.Sun Pharma (%) Metros 14. The contribution of rural areas to revenue has fallen over the past five years.2 CY07 CY08 CY09 CY10 23.8 22.2 39.5 32. There has been significant improvement in revenue per new product launched Sun Pharma's new launch rate has been moderate compared with its peers in the industry.5 22.4 19.2 34.Sun Pharma (%) Metros Class I Tow ns Class II To VI Rural 32.1 Class II TO VI 12.9 26. compared with 63% of the industry average.0 Class I Tow ns 14.9 39.6 13. suggesting a focus on these geographies.0 14.9 9.

2 8.132 30. implying significant productivity improvement of the workforce.9 Grow th (%) 31. We believe that the company will continue to outperform the industry and its peers over the foreseeable future despite a sizable revenue base. Sun Pharma's domestic formulations revenues posted 23. Sun Pharma's topline growth was driven by a significant improvement in MR productivity.2m per MR.8 1. CAGR and scale up: 9/10 We expect 18.Sun Pharma Sun Pharma's .7 23.800 -6.301 10.9 15.2 112.0 FY05 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL 6. which rose to INR7.5 12.7 14. Sun Pharma derived revenue of INR3.3% CAGR and its sales force expanded by just 6. improving its ranking in the industry. Improvement in MR productivity: 9/10 Unlike other leading companies covered in this report.3% CAGR.1 17.383 18.597 18.4 6.6 23. In 2004. The company leads the pack in productivity improvement Sun Pharma has done a stellar job over the past six years with a significant improvement in workforce productivity.3 CY10 Source: Industry/MOSL * Average growth over 2009-2010 5. We believe that.new launches No. August 2011 85 .8m in 2010. Sun is likely to strengthen its presence in key therapeutic areas.1 11. Sun Pharma: Domestic formulations revenue ramp-up Revenue (INR m) 32.5% CAGR from Sun Pharma's domestic formulations business led by a strong presence in the fastest growing chronic therapeutic segments.3 86 CY07 64 CY08 64 CY09 60 CY10 CY07 CY08 CY09 8. Of launches in last 2 yrs Av g s ales per launc h (INR m) Sun Pharma's growth compositions (%) (2010) New Launc hes Ex is ting Brands 163.762 11.1 26.3 103. Over FY04-10.0 19.6 9.810 6. The productivity was among the best in the industry.801 25.5 95.

 One of the most profitable domestic business with strong presence in high growth segments Risks & concerns  Slow progress in resolving cGMP issues at Caraco  Potential damages for "at-risk" launch of generic Protonix in the US.2% CAGR over FY11-13 led mainly by the Taro acquisition.  Gradual ramp-up in emerging market portfolio.8 Sales force addition CAGR (%) Productivity Improvement CAGR (%) 6.  Option values include upsides from future inorganic initiatives .9 Industry Source: Company/Industry/MOSL 7.  Launch of generic Prandin in US under exclusivity.  Steps to sustain profitability of Taro and to improve its R&D productivity.  Strong chemistry skills and backward integrated low-cost operations.600 2010 Sun Pharma 1. of MRs Revenue per MR (INR m) 7.tax can increase significantly if tax laws are changed.2 16.  Targets niche opportunities in the US market.  Ramp-up in generic Effexor XR sales.Sun Pharma Sun Pharma: Sales force productivity No.  Astute tax planning results in very low taxes . Non-domestic business: 7/10 Positives  Strong presence in the US through its own supplies.  Impact assessment  Positive on Sun Pharma's US business given its strong chemistry skills. generic pipeline and monetization of some niche. Core international business (excluding one-offs in the US) will post 34% CAGR over FY11-13. Taro and Caraco. low-competition opportunities. Para-IV and normal products for the US market.5 1.  Integration of Taro and sustaining the improvement in its profitability will be a key challenge.  Expect the international business to post 15.  Pragmatic mix of low-competition. August 2011 86 .799 2004 2.3 3. Key news flows/triggers Update on generic Eloxatin.0 11.  US Federal Circuit Court ruling on Protonix patent litigation.the company has cash of ~USD1b.

804 4.597 18. Ability to scale up its operations in India and the US without sacrificing profitability. Its key markets continue to be India and the US with expanding presence in some of the emerging markets. 3.066 852 57.9 34. It has been able to avoid the temptation to expand in regulated European markets wherein most of its peers have got adversely impacted over the past few years due to regulatory changes.256 16. i. It has been able to achieve this despite being a late entrant in the domestic formulations and the US generic markets. Dr Reddy's Labs and Cipla.083 54 33. leading to EPS CAGR of 24%.801 1.8 60 66 11.6 Gross Sales 43. Its profitability is one of the highest among its peers. ability to strike an optimum balance between growth and profitability.751 40.3 1.061 1.334 % of total sales 47.214 26.301 API 1..4 International sales Formulations 19.0 39. compared with peers like Ranbaxy. A focused approach by the management .076 Branded 3.850 2.357 19.976 15.021 Others 11 11 Total Domestic Sales 20. 2.1 66. Key USPs of the company include: 1.2 47. sustained momentum in the India formulations business and gradual improvement in Caraco. Has established a very strong and profitable domestic formulations business which.0 58.842 57.816 API 3.245 65.6 4.221 15.008 4.409 11.8 52.8 12. Sun Pharma has been one of the most consistent performers among Indian pharmaceutical companies over the past decade.234 17 32.119 57.728 Net Sales 41.4 31.5 14.917 1.Unlike some of its peers it has not spread itself very thin by expanding across the globe.761 Less: Indirect Taxes 1.586 41.428 % of total sales 52. August 2011 87 . offers a strong foundation to scale-up its international initiatives.076 44.948 43.922 17.470 Others 41 66 Total International sales 23.383 41.409 4.892 Taro 0 0 Caraco-Generics15.368 14.4 13.839 16.042 5.833 39.072 -31. Earnings growth and stock attractiveness: 21/30 We expect overall top-line CAGR of 15% over FY11-13. Earnings growth will be driven by the Taro acquisition.2 Source: Company/MOSL DF EBITDA 72% 8-9.6 58.186 17 27.978 4.Sun Pharma Sales mix (INR m) FY09 FY10 FY11 FY12E FY13E FY11-13 CAGR (%) 14.601 75.847 5.607 39.9 EBITDA Contribution Sun Pharm a Non-DF EBITDA 28% Domestic Sales Formulations 19.4 58.033 23.650 19.042 1.132 1.0 28.4 17.101 21.962 13.4 4.130 17 24.982 9.882 6.383 1.662 77.e. given its predictable nature.

9 6 Mar-07 Feb-08 Feb-09 Feb-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 P/E (x) Avg(x) Peak(x) Min(x) 29.6 25. 2.Rather than targeting all the large products. Strong chemistry skills which has enabled it to develop a strong generic pipeline for the US market.This capability is clearly visible in the Taro acquisition wherein. 3. low-competition products along with other normal products. However. Launch of controlled substances in the US. August 2011 88 . Sun is unlikely to make a large acquisition. Inorganic initiatives (Sun has cash of ~USD1b) are a key risk to our rating. we believe that given the recent acquisition of Taro. Identifying key opportunities . It currently has 149 ANDAs pending US FDA approval .one of the strongest pipelines amongst Indian companies. We maintain Neutral with a target price of INR524 (25x FY13E EPS).Sun Pharma An expanding generic portfolio coupled with sustained double-digit growth in high-margin life-style segments in India is likely to bring in long-term benefits for Sun Pharma.0 Sun Pharma non-domestic business: key trends. While we are positive about SUNP's business outlook. despite a 3-year delay. rich valuations have tempered our bullishness. Good product selection in building presence in the US market . Taro integration with potential for improvement in its profitability 4. Key drivers for future include: 1. triggers & risk Building a strong and focused US business Sun has been able to establish itself as a key Indian player in the US generics market through a combination of: 1. Sun Pharma RoE & RoCE (%) Sun Pharma one year forward PE 34 27 20 20. Over the past few years. Ramp-up in US business and resolution of Caraco's cGMP issues 2. Sun has been able to build a very strong pipeline of generic products for the US market.2 13 11. Its ability to sustain superior margins even on a high base is a clear positive. Sun has been able to acquire the company and consequently a profitable portfolio of dermatology and paediatric products. Sun has focused on building a pragmatic mix of niche. Monetization of the Para-IV pipeline in the US 3.

Taro has traditionally enjoyed relatively higher profitability in the US generics market.6 67 18. One of the key attractions is Taro's capabilities of developing and manufacturing of ointments. TARO . Taro enjoys relatively high profitability compared to peers Given its strengths in the low-competition therapeutic segment.fills a key gap and complements Sun's US presence About 90% of Taro's sales come from the US markets. It has expertise in the dermatology and paediatric segments and has about 170 scientists involved in product development. creams.4 56 12 44 CY09 359 6. It has paid ~USD280m for a 66% economic interest in Taro valuing the company at 1x EV/Sales and 4.Sun Pharma Key Indian companies .9 Source: Company/MOSL Taro .8) 2QCY10 98 19 19.6x EV/EBITDA which.4 39 68 20.2 CY10 393 9.2 34 30.6 38 2 36 119.8 30. Sun has been extremely cautious in paying for inorganic growth. lotions in the semi-solids category. albeit gradually. August 2011 89 .4 85 21. The Taro acquisition is a case in point. The acquisition fills-in a key gap in Sun's US portfolio and complements its existing presence in this important market. we believe is a reasonable valuation compared to some of the other acquisitions made by a few Indian players.8 31 71 6 8 25 62 147. under the control of a capable management like Sun.ANDA pipeline Filed Approved 383 Pending Approval 215 180 138 77 104 76 204 138 66 232 151 109 69 40 51 152 101 Aurobindo Dr. the profitability is likely to improve in the future.6 1HCY10 187 1HCY11 219 17.8 51 (70) 121 173.7 71 18 52 (56.9 20 4 17 2QCY11 112 14.Good acquisition at reasonable valuations Unlike some of its other Indian peers. We believe that this is sustainable and in fact.Key financials (USD M) Sales Growth (%) EBITDA EBITDA Margins (%) PBT Tax PAT Growth (%) CY08 337 55 16. Reddy's Ranbaxy Sun Glenmark Lupin Source: Company/MOSL Taro acquisition .

based on the assumption that the US FDA issues will get resolved in FY12.412 4.revenue trend (USD m) Caraco Revenue .553 5. The guidance includes one-offs for both these years. Caraco .404 918 1. We estimate part-recovery in Caraco's core US revenue from FY13.056 2.Sun Pharma Caraco .topline growth of 28-30% for FY12 Sun Pharma management has guided 28-30% topline growth for FY12.119 FY12E 1.5b. the implied growth guidance for core revenue (ex-Taro) is 1819% for FY12. our estimates Source: Company / MOSL Guidance .4b for FY11 (the company has not disclosed these numbers separately) and at INR5b for FY12. However. in the past.076 704 1.Mf gd Products FY12E FY13E Note: Caraco's FY11 financials not given separately. the company has. R&D expenses are estimated at 6% of sales.342 760 8. This will be in line with its past trend of exploiting a few such opportunities every year.Total 350 337 288 234 117 112 125 112 22 FY07 FY08 FY09 FY10 23 FY11E 108 45 138 65 Caraco Revenue . One-offs to continue in FY12 as well albeit with lower magnitude We believe SUNP will try to capitalize on some of the Para-IV/low-competition opportunities in the US in FY12. The company intends to file ~25 ANDAs for FY12.378 Source: Company / MOSL August 2011 90 . The ongoing US FDA issues have adversely impacted Caraco's core revenue (excluding distributed products revenue) for the past two years. we also believe that one-off upsides are likely to decline YoY in FY12 due to the absence of large opportunities like generic Eloxatin which was a key contributor in FY11.530 1. The strong growth will be partly driven by full-year consolidation of Taro financials as compared to a little over two quarters for FY11. FTF/low-competition Upsides in US (INR m) FY11 Eloxatin Exelon Keppra Inj Effexor-XR Protonix Taxotere Prandin Total one-off revenues Total one-off PAT 4. and capex is estimated at INR4. Based on these upsides for one-offs.US FDA resolution is likely to be long-drawn While there is no fresh update on the US FDA resolution at Caraco. indicated that the process will be very gradual. hence. Sun had recorded significant one-off upsides. which we estimate at INR8.181 1.

069 -5.072 Closing Balance 6.6 75 90 360 0.480 14.358 1.115 45.618 15.6 2.241 74.589 9.711 81.908 (INR Million) 2012E 1.968 4.2 22.121 10.9 5.116 2.746 1.612 43.075 56 3.892 136.179 (inc)/dec in FA (Pur)/Sale of Investments CF from investments Change in networth (Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin.289 1.0 13.809 2011 19.864 8.533 12.8 120.0 12.7 22.060 30.7 75 94 293 2.234 9.9 6.310 60.013 15. Assets Inventory Account Receivables Cash and Bank Balance L & A and Others Curr.293 13.633 Interest/Dividends Recd.976 15.7 3.672 34.500 1.9 27.601 14.406 (INR Million) 2012E 20.637 24. PAT 2010 41. PBT Tax Tax Rate (%) Profit After Tax Change (%) Margin (%) Less: Mionrity Interest Net Profit Adj.333 26.0 0.256 4. of Funds E: MOSL Estimates 2010 1.0 0.100 62 2.716 21.377 57.6 33 913 18.562 7.448 7.484 29.9 3.936 28.1 24.791 31.5 16.293 2013E 24.511 9.932 -890 1.2 2013E 20.7 105 96 263 2.254 78.212 5.3 33 -40 13.675 CF from Operations 10.7 2011 17.690 6.157 15.4 6.876 -4.0 14.720 22.251 2.293 43.977 -4.351 21.633 33.376 20.036 123. Account Payables Provisions Net Current Assets Appl.908 36.835 -2.9 23.146 41.510 8.333 -1.097 17.542 81.6 34.626 21.798 94.392 117.330 17.716 18.748 6.492 1.302 6.041 (INR Million) 2012E 65.4 31 2350 20.7 1.1 7.157 Inc/Dec of Cash -10.5 37.172 14.939 103.6 31. 2.3 19.357 21.284 6.221 10.042 2011 1.811 68.794 11.072 8.370 1.6 19.7 20.036 93.042 23.756 -56 -4.2 19.9 4. Liability & Prov.2 2012E 19.631 149 2.500 0 -2.2 1.069 -14.579 4.9 17. Profit/(Loss) bef.9 20.031 21.046 -533 17.8 5.214 39.321 -5.6 20.161 14.612 18.661 124.728 13. Deprn.448 7.028 -1.0 Cash Flow Statement Y/E March 2010 Oper.6 21.4 2.8 0.8 20.936 11.3 22.448 7.2 23.0 20.4 75 93 319 2.791 3.864 28.308 -7.833 8.835 7.448 4.276 1.074 41.8 24.1 10.4 4. Net Fixed Assets Capital WIP Goodwill Investments Curr.2 35.545 10.4 0.938 60 4.328 1.720 22.8 13.003 708 1.477 10.008 67.203 5.095 3.5 18.394 66.822 -3652 0 1.114 18.036 77.256 103.5 3.720 22.351 -1.7 2.936 Note: Cashflows do not tally due to acquisition August 2011 91 .500 136.036 107.5 22.471 -28.480 28.734 15.1 32 2750 21.500 0 0 -60 -5.0 24.348 -78 -62 -3.500 117.5 13.830 -4.6 3.472 -3652 0 4.500 0 -4.241 6.149 679 4.8 51.3 20.876 20.310 71.467 14.696 13.8 13.069 5.989 -2.7 44.072 21.545 15.5 91.121 6.672 2.9 32.6 19.500 0 -4.0 0.441 108.920 -12.571 -3652 0 1.053 26.799 29.211 1.543 65.7 0.111 Direct Taxes Paid -890 (Inc)/Dec in WC -4. Activity -2.769 28.8 18.045 12.Sun Pharma Financials and valuations: Sun Pharma Consolidated Income Statement Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depreciation EBIT Int.354 -8.501 2011 57.Rec.8 26.980 7.111 14.500 1.8 22.340 8. Tax 13.664 37.726 14.146 2013E 1.952 2013E 75.864 Add: Beginning Balance 16.5 22.626 Ratios Y/E March Basic (INR) EPS Fully Diluted EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital T/O (Days) Leverage Ratio Debt/Equity (x) 2010 13.739 11. and Finance Charges Other Income .7 16.5 22.041 17.5 75.2 Consolidated Balance Sheet Y/E March Equity Share Capital Total Reserves Net Worth Minority Interest Deferred Liabilities Secured Loan Unsecured Laon Total Loans Capital Employed Gross Block Less: Accum.407 -5.545 -149 -4.3 104.981 16.6 17.310 93.968 32.968 -16.030 45.

6 RoCE (%) 26. The company ranks first in the fast growing gynecology segment.12 Rel.801 8. (USD b) 204.2 EV/ EV/ sales EBITDA 4. Cadila is among the top three players in two of the largest therapeutic segments.000.9 22. Enjoys good brand equity in a couple of therapeutic segments.3 41.4 -8. The company's growth rate in all geographies has accelerated from CY09. (%) M.Cap.2 14.4 7. Revenue growth has been driven largely by its existing products over the past four years.0 Background Cadila is amongst one of the largest domestic pharma companies in India with a strong focus on the global generics opportunity.6 29.717 59.Domestic Formulations | New Peaks MEDICINES CAPSULE Cadila Healthcare CMP: INR824 TP: INR907 MEDICINES Score 60/100 CDH IN Guts and glory! M: Mix 6/10 Neutral 7/10 E: Equity with doctors Cadila's relatively small presence in the fast growing segments of Diabetes.8 6. Stock info Equity Shares (m) 52-Week Range (INR) 1.983 5.8 3.2 26.1 17.4 37.334 5.5 30.1 P/E (X) 33.7 3. It employs one of the larger field forces in the industry with MR strength of 4.5 27.3 27.7 984/599 5/18/44 168.2 17.6. The company is gradually building its presence in the regulated generic markets beginning with the US and France. CVS and GI. It also plans to tap some unique opportunities through its JVs with Nycomed.4 2. respiratory and CVS segments.4 45.7 Financial & valuation summary Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS EPS (INR M) (INR M) (INR) GR.7 26.1 55.1 20.4 30.5 25. Cadila has few new introductions compared with its peers and this is one reason why it has not been able to outperform the market in the past.8 3. (%) 36. The CVS and GI segments' contribution to revenue has risen over the past 10 years from 24% to 37% while that of respiratory and anti-infectives has fallen from 32% to 21%.011 6.2 5. (INR b) M. August 2011 92 .302 51. CNS & CVS (contributes ~24% to sales) will make it difficult for the company to outpace the market growth.868 46. Perf.4 27.419 24. Hospira. Bayer and Bharat Serums.0 P/BV (X) 10. D: Distribution & reach 7/10 I: Introductions 5/10 Cadila derives 65% of its revenue from metro and tier-I cities and is expanding its presence in tier-II to tier-VI towns.Cap. Cadila has a good prescription market share in the GI.9 28.0 RoE (%) 35.

6m in 2010. low-risk management style is his key achievement. driven by a cautious approach towards international expansion and a profitable domestic business.000 850 700 550 400 Aug-10 Nov-10 Feb-11 May -11 Sensex .1x FY12E and 20. We expect Cadila to post revenue CAGR of 1314% over FY11-13. which is slightly below compared to 15-16% CAGR for the industry. It is promoted by Mr. C: CAGR and scale-up 6/10 I: Improvement in productivity 5/10 Cadila's domestic formulations business posted revenue CAGR of 12. Cadila's is MR productivity has declined at 2% CAGR over 2004-10.Cadila Chairman Profile Chairman Cadila is one of the most consistent performers amongst the Indian pharmaceutical companies. Reiterate Neutral with a target price of INR907(22x FY13E EPS plus INR3 upside from Taxotere).1m in 2004 to INR3. Earnings growth will be led by traction in the international business and steady growth in the domestic portfolio. We expect overall top-line CAGR of 14% over FY1113 leading to EPS CAGR of 15%. which is slightly below market growth during the same period. We expect Cadila's international business to post revenue CAGR of 16% over FY11-13.4% over FY05-11. indicating a fall in sales force productivity. Sustaining strong growth and return ratios coupled with a very conservative. is in line with the industry average. MR growth was 11. Cadila has a good track record of forging partnerships with global players.3% and revenue growth was 9.0x FY13E consolidated earnings. S: Stock Attractiveness We expect RoE of 25-30% over the next two years. N: Non-domestic business 6/10 E: Earnings growth 6/10 We are positive on Cadila's international business. led by 18% CAGR for formulation exports.2%.Rebas ed 12/20 Aug-11 August 2011 93 . Pankaj Patel. Stock performance (1 year) Cadila Health 1. which however. Cadila is valued at 29. given its strong chemistry skills and pragmatic mix of its geographic presence and partnerships. Cadila is one of the most consistently performing Indian pharmaceutical companies. A cautious approach to establishing international presence has ensured sustained higher return ratios for investors. Revenue per MR declined from INR4. Rapid scale-up in revenue would be difficult given Cadila's high base and small presence in fastgrowing chronic segments.

Cadila is the largest player in the gynecology segment. EBITDA Contribution Guts and glory! Strong in GI. GI and Gynaecology dominates the therapy mix FY11 Anti-Malaria 0% VMN 2% Dermatology 3% GI 17% CNS Others 3% 16% CVS 21% Mkt Share (%) Gr.9 3.46% in 2006. contribute about half of Cadila's domestic formulations revenue. contribute 11% and 10% respectively to total revenue.Cadila India formulations snapshot Domestic formulations contribute most to revenue The domestic formulations business is a major contributor to Cadila's revenue and EBITDA. GI and gynecology. We believe Cadila is likely to post a top-line of 13-14% CAGR over FY11-13. maintains market share amidst rising competition Cadila is among the leading companies in the domestic formulations business and has maintained its market share over the years despite growing competition. The company has been expanding its presence in all geographies. Cadila's domestic formulations business grew at 12. 1. which is slightly below compared to the industry growth. Some of Cadila's brands lead in their segments and the company has strong brand equity in therapeutic segments like CVS and GI. which is visible from its growth in 2009 and 2010.4% CAGR over the last 6 years versus 14% CAGR for industry.8 8.7 24. GI and Gynaecology dominates the therapy mix CNS 2% Others 13% FY01 CVS 13% Others 20% FY05 Among the leading players in the industry Cadila leads in the highly competitive domestic formulations market and is among the top five companies in the industry with market share of 3. Cadila has maintained it market share over the years despite growing competition VMN 9% GI 11% CNS 2% CVS 22% Pain Mgmt 9% AI 16% Respira tory 15% Gynae cology 12% Pain Mgmt 9% AI 11% Respira tory 10% Gynae cology 10% GI 16% CVS.6 3. since it is one of Cadila's most profitable businesses. the contribution of CVS and GI segments to revenue rose from 24% to 37% while that of respiratory and anti-infective segments fell from over 32% in FY01 to less than 21% in FY10. (%) 13.7 Res pira tory 11% Gy naec ology 10% 2006 2007 2008 2009 2010 Source: Industry/MOSL August 2011 94 .7 14. Mix: 6/10 Non-DF EBITDA 55% DF EBITDA 45% CVS.7%. CVS.6 3. Besides. We believe despite strong contribution to profitability. gynecology dominate sales The top 3 therapeutic segments. Over the past 10 years. CVS.6 16. Cadila's market share rose to 3. CVS. such as respiratory and anti-infective.2 Pain Mgmt AI 7% 10% 3.5 3. GI. capital employed in the business is proportionately lower. In FY11 the segment contributed 40% to Cadila's revenue and we estimate EBITDA contribution was ~45%. Other large segments.74% in 2010 from 3.

August 2011 Gynaecology Dermatology Dermatology CVS GI Respiratory Respiratory CVS 95 . gynecology segments Cadila has been a dominant player in two of the largest therapeutic segments of the industry.0 24. indicating lower brand concentration.0 3.5%.0 6. It ranks second in the GI segment with value market share of 6.1 18.Cadila 2. CVS).7 18.9 17.9 18. Cadila ranks second in the GI segment with a prescription market share of 4.5 6.2 24.0 2. Cadila has either grown in line with or above the industry average in its top 4-5 therapeutic segments.5%.2 6. Aten (Atnolol.5% CAGR over the past four years.Industry 66. Cadila's prescription ranking Jan-07 GI Gynaec Respiratory CVS Pain Mgmt 1. Equity with doctors: 7/10 Good brand equity.0 7.4 16.4%.0 1.0 Jan-10 Oct-10 2.8 17.7 16.0 2.0 3.4 4. It ranks third in the respiratory segment with market share of 4.0 3. among leaders in CVS.4 GI * Average growth over 2009-2010 Pain/Analgesic Pain/Analgesic Gynaecology Source: Industry/MOSL In terms of the number of prescriptions written.9% and seventh in the CVS segment with a prescription market share of 4.0 5. CVS and GI.0 24.4 Value growth comparison (%) (2010) Av g Gr .Company Av g Gr .0 3.0 2.5 5.0 3.0 2. Cadila ranks first in the gynecology segment with value market share of 10.0 20.0 Source: Industry/MOSL Top 10 brands contribute 30% of revenue Cadila's top 10 brands contribute ~30% to total revenue. Cadila's has outperformed the respective segment growth.0 2. In the pain management and dermatology segments.7 15. CVS segment with value market share of 6. Cadila has improved its ranking in the gynecology and respiratory segments and its ranking in CVS deteriorated a bit. Its No1 brand.0 Jan-08 2. GI.0 1. Value market share in key therapies (%) (2010) 10.0 2.0 Jan-09 2. Six of the top 10 brands posted CAGR in double digits over the past four years.5% and it ranks third in the fast growing and second largest.5%.1 18.0 2.8 16. ranks thirty-seventh in the industry and it reported 12.

5 30.0 19.4 13.3 4.7 27.3 19.5 18.7 30.5 17.6 10.7 17.1 19.9 17.8 32.6 8.5 CY07 CY08 CY09 CY10 Source: Industry/MOSL August 2011 96 . revenue CAGR for all geographies except metros were in line or marginally better than that of the industry average.3 10.6 19. In the past four years.9 25.0 30.1 18.0 CY07 CY08 CY09 CY10 CY10 Cadila: geography-wise growth rates (%) Metros 24.0 CY09 31.9 19.0 11.4 2.5 31.4 31.5 6.5 CY 06 32.0 11.9 19.6 CLASS II TO VI 18.2 19.0 CY09 CY10 19.9 5.Cadila Cadila's top 10 brands Brand Drug Product Launch Sales (INR m) 1993 2000 1991 1996 1981 1969 1995 1983 2002 1999 865 585 517 484 637 432 379 352 346 456 YoY Gr (%) CAGR (%) Aten Atenolol Atorva Atorvastatin Ocid Omeprazole Falcigo Artesunate Deriphyllin Etophylline+Theophylline Primolut-n Norethisterone Amlodac Amlodipine Dulcolax Bisacodyl Mifegest Mifepriston Pantodac Pantoprazole CAGR through 2006-10 19.4 18.5 RURAL 17.0 19.5 17.2 15.9 CY07 28.7 32.3 CLASS II TO VI 16.7 11. Distribution and reach: 7/10 Cadila derives 65% of its revenue from metros and class-I towns compared with 63% of the industry average.3 20.5 15.3 Source: Industry/MOSL 3.3 14.6 14.5 16.4 32.1 7.7 1. Cadila: Geographical distribution of revenues (%) METROS 18.3 18.2 10.0 2.9 24.5 18.6 CLASS I TOWNS 20.4 Industry: Geographical distribution of revenues (%) METROS 20.2 32.6 32.2 32.3 Industry: geography-wise growth rates (%) Metros Class I Tow ns Clas s II to VI Rural 26.6 13.2 23.1 8.9 31.5 Clas s I Tow ns Class II to VI Rural 25.8 6.5 CLASS I TOWNS 18.7 9.6 CY06 28.4 RURA L 15.7 16.5 18.5 5.6 10.5 20.8 32.6 14.0 11.2 12.1 16.1 32.0 16.9 CY08 30.0 31.4 18.5 -5.8 CY07 CY08 5.

9 90 CY07 84 CY08 101 CY09 113 CY10 4. CAGR and scale up: 6/10 We expect 13-14% CAGR for Cadila's domestic formulations business led by existing products.7 12. Cadila .458 17. It's absence in fast growing lifestyle segments except CVS. increasing geographical penetration and incremental contribution from new launches.5 5. Cadila .6 12.889 14. This is below our estimated forecast of 15-16% CAGR for the industry.9 8. will make it difficult for it to outpace industry growth. Introductions: 5/10 Cadila's growth over the past four years has been led by existing products and new launches Over the past four years Cadila launched 49 new products (including line extensions) annually which is in line with its peers.8 YoY Grow th (%) 18. Average revenue per new launches has grown from INR42m in CY07 to INR94m in CY10.2 CY09 7.5 41.new launches No.347 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL 22. Its focus on improving workforce productivity needs to be enhanced for it to grow its business more profitably.domestic formulations performance DF Revenues (INR m) 15.763 12.4 16.603 11.6 14.0 CY07 5.6 74.4 10.7 13.Cadila 4. Of launc hes in last 2 y rs Avg s ales per launch (INR m) 75.7 CY08 6.197 9.7 CY10 Source: Industry/MOSL Cadila growth compositions (%) New Launches 94.4 Existing Brands 8. Outperformance of the industry seems difficult due to a lower prescription share in highgrowth lifestyle segments and the anti-infective segment.146 19. Cadila's revenue growth is driven by existing products and new launches.3 10.2 9.0 2.793 August 2011 97 .

5 4.6 2.100 -1.3 1.000 3.9 11.2% CAGR over FY04-10 and its sales force posted 11. fares poorly when compared with the industry productivity Cadila's domestic formulations business revenue posted 9. implying negative productivity of the workforce. Improvement in MR productivity: 5/10 Cadila's top-line growth is driven by sales force additions. News flow/triggers  Ramp-up in supplies to Hospira and Abbott.Sales force productivity (2004-10) No.3% CAGR. compared with the average of performances covered in the report.1 Rev enue per MR (INR m) Sales forc e addition CAGR (%) Productivity Improv ement CAGR (%) 11. August 2011 98 .  NCE research yet to deliver desired returns for investors. of MRs 4. which fell to INR3. Cadila derived sales of INR4. Non-domestic business — Snapshot: 6/10 Non-domestic business: Snapshot Positives  Expanding presence in emerging and regulated markets through a mix of its own presence and front-end acquisitions. Risks and concerns  Needs to build a differentiated portfolio in the US to access low-competition opportunities. Cadila .  Signing of supply agreements with MNCs.  Low-risk strategy to access international markets through its own presence and partnerships. In 2004.6m in FY10.  Strong chemistry skills and fully backward integrated low-cost operations help in making the US business viable despite being a late entrant.1m per MR.Cadila 6.9 2004 2010 Cadila Indus try Source: Industry/Company/MOSL 7. The company has initiated steps in this directions. Cadila's performance was below average.  Slow progress in accessing the Japanese generic opportunity.  Supplies of injectables to Hospira to ramp-up in the next 1-2 years while the Abbott tie-up for emerging markets is likely to contribute from FY13 onwards.

5 51.5 Consumer & Others 3. We believe that valuations are rich and leave little scope for further re-rating. the strong earnings upgrade cycle of the past two years could break.Cadila Impact assessment  We are positive on Cadila's international business given its strong chemistry skills and pragmatic mix of own presence and partnerships.458 17.3% CAGR for formulation exports.018 19.146 19.372 14. We believe that this track record would be subjected to many challenges.120 3.763 59.4 49.8 APIs 426 318 352 317 348 -0.3 51. Cadila trades at 29.400 3.214 22.5 48. ramp-up in supplies to Hospira and sustained double-digit growth in domestic formulations and consumer businesses.172 36.458 6.5 Total Exports 12.  Expect 16% CAGR for the international business over FY11-13 led by 18.9 Gross Domestic sales16. Our target price is INR907 (22x FY13E EPS + INR3/share DCF value of earnings from Taxotere).060 3.435 18.917 13.  Has a good track record of forging partnerships with global players.472 3. Sustaining double-digit growth without diluting return ratios has been the company's USP and has led to a significant re-rating of the stock.8 49. This target implies a topline CAGR of 25% for FY11-16. We maintain Neutral.0x FY13E consolidated EPS. August 2011 99 . Sales mix (INR M) FY09 FY10 FY11 FY12E FY13E FY11-13 CAGR (%) EBITDA Contribution Domestic Sales Formulations 12.676 14. Earnings growth and stock attractiveness: 18/30 Cadila's growth will be led by increased traction in its international businesses.827 5.8 % to sales 56.121 28.325 25.6 50. which we believe is very aggressive. The company will have to invest significant resources to achieve this target.7 Note:Estimates exclude Nesher acquisition pending availability of more details from Cadila management.1x FY12E and 20.6 Export Formulations 9.886 25. Non-DF EBITDA 55% DF EBITDA 45% Source: Company/MOSL 8-9.724 22.197 13. We estimate 15% revenue and EPS CAGR for FY11-13 for core operations excluding one-offs and RoE of 27-28% over the next two years.  Cautious approach to establishing an international presence has ensured sustained higher return ratios for investors.672 3.7 48. as Cadila tries to aggressively scale-up to achieve its revenue target of USD3b by FY16.2 50.347 22.418 22.712 0.838 18.736 17.948 4.5 % to sales 43. Given the disappointing core performance for the last two quarters and likely impact of the Nesher acquisition.550 15.4 Gross Sales 29.642 30.211 50.142 45. which can raise its risk profile.170 26.467 14.889 14.2 Export APIs 3.

Cadila

Cadila RoE & RoCE (%)
RoE 37.5 35.4 RoCE

Cadila one year forward P/E
P/E (x) 35 28 22 30.2 24.6 15.8 Avg(x) Peak(x ) Min(x )

26.7

26.9 26.4

30.5

27.3 25.4

27.6
15

27.2
9 2 Mar-07 F eb-08 Aug-06 Aug-07 Aug-08 6.5 F eb-09 F eb-10 Aug-09 Aug-10 F eb-11 Aug-11

23.1

23.6

2008

2009

2010

2011

2012E

2013E

Annexure: Cadila non-domestic business New launches to drive growth in the US Cadila has a pipeline of 65 ANDAs pending approval and has received 65ANDA approvals so far (including tentative approvals). The company filed 24 ANDAs in FY11 and launched 11 products in the US. It expects to file 15-20 ANDAs with the US FDA every year and get about 8-10 approvals a year. Cadila's US business is witnessing increased traction due to the absence of some of the competitors (due to US FDA issues) and new product launches. The company is also improving its market share in already launched products. We expect Cadila to post sales of INR11.9b in FY12 against INR9.7b in FY11. We expect this business to grow by 20% CAGR over FY11-13. Cadila has also commenced development and filing of potential low-competition products with delivery advantages (trans-dermal patches and respiratory products) and is focusing on developing a pipeline of such niche products (likely to be commercialized after FY12). Nesher acquisition - long-term positive, but may pressurize P&L in short term Cadila recently entered into an agreement to acquire certain assets and liabilities of Nesher Pharma in the US (a subsidiary of KV Pharma) for ~USD60m. It has acquired Nesher's existing and future product pipeline, its manufacturing facility and R&D lab. Cadila will also take over certain liabilities. The transaction is likely to close by August/September 2011 and Cadila will be consolidating Nesher's financials with effect from August/ September. With this acquisition, Cadila gets access to Nesher's controlled substances pipeline (besides other products) as well as access to its manufacturing facility for these controlled substances. Nesher's ANDA pipeline includes 8 filings and another 5 products under development, which address a potential on-patent market of USD2.1b. We note that given the possibility of controlled substances being abused as drugs, the US government has put stringent rules in place for monitoring the manufacturing and sale of such products. This includes a prerequirement of a local manufacturing facility with DEA license to manufacture and supply such products in the US. Through the Nesher acquisition, Cadila gets access to a DEAlicensed facility.

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Cadila

Given the entry barriers, we believe that the controlled substances market will be a lowcompetition market for generics players. Currently, Nesher is making net losses, which may pressurize Cadila's P&L till it is able to turn around Nesher's operations. Cadila management has guided that Nesher is likely to contribute ~USD15m in revenue for FY12. It expects Nesher to report a minor net loss for FY12 and a positive bottomline for FY13. We are awaiting further clarity from Cadila on the plans for achieving this turnaround. We also note that Cadila management has a track record of being conservative in its inorganic initiatives and has not made any acquisitions in the past which have diluted the return ratios for investors. Hospira supplies to ramp up in FY12 led by Taxotere, new launches Cadila's supplies to Hospira commenced in FY10, recording INR839m in revenues for supplies to Europe. It posted FY11 revenue of INR2.15b led by the launch of exclusivity product generic Taxotere in the US. We expect a ramp-up in this business in FY11 led by commercialization of more products and revenue from limited competition product Taxotere for some more time. We expect FY12 revenue of INR803m to Cadila from Taxotere. However we have not included it in our FY12 estimates. We are valuing the upside based on the DCF method (INR3/share) since this is a limited period opportunity. French operations to record 14% CAGR While Cadila's French operations are completely aligned to a low-cost generic market, we expect only 14% CAGR for this business over FY11-13 driven mainly by the slow market growth. Emerging market revenue to grow by double-digits Among emerging markets, Cadila is present mainly in Latin America. We expect Cadila's emerging market revenue to record 17% CAGR over FY11-13 driven by new launches and favorable demographics. Abbott tie-up: Supplies to start from FY13 In FY10, Cadila entered into a supply agreement with Abbott to supply 24 branded generic products to meet Abbott's requirements in 15 emerging markets (names not disclosed). The agreement also includes an option for 40 additional products to be included over the term of the collaboration. Cadila will make the products at its facilities in India. The products selected fall in categories of pain, cancer, CVS, neurology and respiratory illnesses. Product names have not been disclosed. The supplies will enable Cadila to capture a part of the upsides in some emerging markets where it does not have a presence. We believe this is a long-term positive for Cadila, given the possibility that such arrangements tend to include a larger product basket over time. We expect the supplies to start from FY13.

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Cadila

Financials and valuations : Cadila
Income Statement
Y/E March 2010 2011 46,302 25.6 36,040 10,262 22.2 1,269 8,993 699 131 8,425 0 8,425 1,064 1,064 12.6 7,361 251 7,110 6,334 Net Sales 36,868 Change (%) 25.9 Total Expenditure 28,863 EBITDA 8,006 Margin (%) 21.7 Depreciation 1,339 EBIT 6,667 Int. and Finance Charges 821 Other Income - Rec. 159 PBT before EO Expense 6,004 Extra Ordinary Exp./(Inc.) 46 PBT after EO Expense 5,958 Current Tax 741 Tax 741 Tax Rate (%) 12.4 Reported PAT 5,217 Less: Mionrity Interest 247 Net Profit 4,970 PAT Adj for EO Items 5,011

(INR Million)
2012E 51,717 11.7 41,427 10,291 19.9 1,569 8,721 731 207 8,197 0 8,197 1,230 1,230 15.0 6,968 301 6,667 5,801 2013E 59,983 16.0 47,500 12,483 20.8 1,779 10,704 650 272 10,326 0 10,326 1,549 1,549 15.0 8,777 358 8,419 8,419

Ratios
Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE 2010 24.5 30.8 79.0 5.0 23.7 2011 30.9 40.9 106.1 6.3 20.8 2012E 28.3 40.2 132.7 6.3 21.6 2013E 41.1 49.8 165.4 8.7 23.8

33.7 26.7 10.4 4.8 22.1 0.6

26.6 20.1 7.8 3.8 17.2 0.8

29.1 20.5 6.2 3.4 17.2 0.8

20.0 16.5 5.0 2.9 14.0 1.1

35.4 26.4

37.5 30.5

27.3 25.4

27.6 27.2

Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Minority Interest Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr . Assets Inventory Account Receivables Cash and Bank Balance Loans & Advances Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2010 682 15,501 16,183 392 1141 10,905 28,621 25,578 8,734 16,844 2,482 207 17,749 7,504 4,668 2,507 3,070 8,661 6,710 1,951 9,088 28,621 2011 1,024 20,691 21,715 669 1127 10,973 34,484 28,320 9,994 18,326 4,310 207 22,829 8,119 7,652 2,952 4,106 11,188 8,955 2,233 11,641 34,484

(INR Million)
2012E 1,024 26,154 27,178 0 1127 10,442 38,748 33,320 11,563 21,757 4,310 207 26,084 10,025 9,524 1,773 4,762 13,611 10,777 2,834 12,473 38,746 2013E 1,024 32,841 33,865 0 1127 9,286 44,290 36,320 13,342 22,978 4,310 207 33,719 12,924 12,337 2,877 5,581 16,937 13,218 3,719 16,782 44,290

Working Capital Ratios Fixed Asset Turnover (x) 2.3 Debtor (Days) 46 Inventory (Days) 74 Working Cap. Turnover (Days) 65 Leverage Ratio (x) Current Ratio 2.0 Debt/Equity 0.5 * Ratios adjusted for bonus issue

2.6 60 64 68

2.6 66 71 76

2.7 74 79 85

2.0 0.4

1.9 0.3

2.0 0.2

Cash Flow Statement
Y/E March Oper. Profit/(Loss) bef. Tax Interest/Dividends Recd. Direct Taxes Paid (Inc)/Dec in WC CF from Operations CF from Oper. incl EO Exp. (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Change in Networth Inc/(Dec) in Debt Interest Paid Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2010 8,006 159 -741 -402 7,022 6,976 -3,478 42 -3,436 289 -1,605 -821 -1,237 -175 -3,550 -10 2,517 2,507 2011 10,262 131 -1,064 -2,108 7,222 7,222 -4,579 0 -4,579 -301 345 -699 -1,529 -14 -2,198 445 2,507 2,952

(INR Million)
2012E 10,291 207 -1,230 -2,011 7,257 7,257 -5,000 0 -5,000 0 -1,200 -731 -1,505 -3,436 -1,179 2,952 1,773 2013E 12,483 272 -1,549 -3,206 8,000 8,000 -3,000 0 -3,000 0 -1,156 -650 -2,090 -3,896 1,105 1,773 2,878

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Domestic Formulations | New Peaks This page is left blank intentionally August 2011 103 .

It launched 65 products (including line extensions) a year over the past four years. Ranbaxy is ranked at No3 position in the AI segment with a prescription market share of 7.3 P/BV (x) 2.4 RoCE (%) 9.9 16. August 2011 104 .8% and it ranks No4 in the dermatology segment with a prescription market share of 5.5 Background Ranbaxy is a leading global generic company with global revenues of over USD1.911 10. (INR b) M.. UK.3 P/E (x) 15.8 15.991 7.970 89.4 11.005 1.7 2.0 23. (%) M.0 41. France.Cap. Over the past five years. Ranbaxy is a dominant player in large therapy segments like AI.7 EPS Gr.7 11.9b. Germany. Some of its brands like Storvas have good brand equity in the CVS segment. Ranbaxy's field force has been recently expanded by 50% to 4. M: Mix 6/10 Sell 5/10 E: Equity with doctors Ranbaxy operates mainly in acute therapeutic segments.Domestic Formulations | New Peaks MEDICINES CAPSULE Ranbaxy CMP: INR468 TP: INR412 MEDICINES Score 49/100 RBXY IN Sayonara.242 93.3 Financial & valuation summary Year End 12/09A 12/10A 12/11E 12/12E Net Sales PAT EPS (INR m) (INR m) (INR ) 75. Ranbaxy enjoys low brand equity with doctors except in the AI and dermatology segments.2 33.4 625/414 0/6/6 196.4%.4 RoE (%) 4. Revenue growth has been driven by existing products and new launches. Brazil and other emerging markets. contribute ~68% to Ranbaxy's domestic formulations revenue.6. unless .Cap.4 2. D: Distribution & reach 7/10 I: Introductions 5/10 Ranbaxy derives 66% of its revenues from metros and tier-I cities. It is yet to strengthen its presence in the chronic segment. Ranbaxy's brand equity has taken a beating in almost all therapy areas.9 2.3 2. (USD b) 420.052 4.0 18. along with the sex stimulant segment.4 10.5 25. The segments. The company has established a direct presence across the world in key markets like US.855 4. (%) -38. Distribution reach in metros has increased over time but the contribution of rural geographies to revenue has fallen over the past four years..1 EV/ EV/ Sales EBITDA 2.8 4. Stock info Equity Shares (m) 52-Week Range (INR) 1.8 11.1 23.9 10. Ranbaxy has been aggressive in launching new products over the past four years compared with its peers. deriving 76% of its revenue from the segment.1 -54. Around 40% of its revenues come from the developed markets of the US and Europe while emerging markets contribute about 50-55% of revenues. Perf.2 467.12 Rel.4 19.608 85.500 MRs.2 11. CVS and pain management.

albeit on a very low base. high cost acquisitions and on-going US FDA issues have adversely impacted overall return ratios.0x CY11E and 23. The current productivity of INR3.4% over CY10-12. Ranbaxy is likely to maintain its leading position in the sector given its strong position and market share in some of the largest therapeutic segments. Reiterate Sell with a target price of INR412 (20x CY12E EPS) excluding Para-IV upsides.2b over CY1114. underperforming market's growth. they will still remain sub-optimal. We expect the international business to post 13% CAGR over CY10-12 excluding low-competition and Para-IV products in the US. Cost reductions leading to improved profitability and gradual recovery in the US business will be key growth drivers. CEO C: CAGR and scale-up 6/10 I: Improvement in productivity 3/10 Ranbaxy posted revenue CAGR of 10. Establishing a global generics business and a leading position in India.6m per MR is in line with the industry average.2% in the domestic formulations market over CY04-10.Rebased 105 . Arun Sawhney (MD). While we expect some improvement in return ratios by CY12. Ranbaxy is valued at 33. This slightly lower than our forecast CAGR of 15-16% for the industry. leading to DCF value of INR77/share. leading to EPS CAGR of 53%. We expect CAGR of 14% for Ranbaxy's domestic formulations business led by its recent field-force expansion and rapid new launches.3x CY12E consolidated earnings. Option values (Para-IV products) will make a onetime contribution to PAT of INR38. We expect overall core top-line CAGR of 14.2% CAGR and its sales force posted 15% CAGR over 2004-10 implying negative MR productivity. August 2011 9/20 Stock performance (1 year) Ranbaxy Labs 640 580 520 460 400 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Sensex . Ranbaxy's domestic formulation revenue posted 10. coupled with one of the strongest pipeline of First-to-File opportunities in the US is the key achievement of the company.Ranbaxy CEO Profile Ranbaxy is currently a 64% subsidiary of Daiichi Sankyo (Japan). S: Stock Attractiveness Aggressive international expansion. N: Non-domestic business 5/10 E: Earnings growth 3/10 We are neutral on Ranbaxy's international business despite its strong presence in the US and in emerging markets due to ongoing US FDA issues and moderate profitability of its international operations. It is being currently managed by a team of professionals headed by Mr.

1 4.Ranbaxy India formulations snapshot Domestic formulations significant PAT contribution The domestic formulations business is a leading contributor to Ranbaxy's revenue and contributes ~98% to its EBITDA excluding one off upsides. The company grew its business at 10.0 7.1% in 2006. 2006 2007 2008 2009 2010 August 2011 106 . CVS. However. CVS. Ranbaxy ranks first in AI. Ranbaxy's strength lies in its strength in the acute therapeutic segments. pain management and sex stimulants contribute ~68% to Ranbaxy's domestic formulations revenue. This under performances can be attributed to the fact that Ranbaxy derives most of its revenue from highly competitive acute therapeutic segment. dermatology segments Ranbaxy has been a dominant player in three of the largest therapeutic segments of the industry. Ranbaxy holds 4.8%. Ranbaxy's dependence on the AI segment has fallen over the past 10 years while the contribution of CVS.02 5.69% market share.97 4. CVS and pain management. Ranbaxy derives ~76% of its revenue from acute therapies. 1. AI. AI. Ranbaxy is among top three players in the industry Vitamins Respira 14% tory 2% CNS 5% Derma 3% GI 4% Pain 8% AI 51% CNS 4% GI 7% Derma 8% AI 35% CVS 6% Sex stimulants 9% Pain 11% CVS 13% Source: Company/Industry/MOSL 2. 98% The second largest Indian player in the industry Ranbaxy has consistently ranked among the top three players in the industry due to its strong presence in two of the largest therapeutic segments in the industry.4 7.8 5.69 14.. it has underperformed the market over the past four years and has been losing market share.09 5. it ranks sixth in the CVS segment with market share of 5. However Ranbaxy's growth has been sluggish compared with the segments' growth over the past two years.2% CAGR over the past six years while the industry posted 14% CAGR. unless . CVS and pain management. with market share of 10. Equity with doctors: 5/10 Mkt Share (%) Grow th (%) 21. EBITDA Contribution Non-DF EBITDA. pain and GI improved over the years. Ranbaxy: Therapeutic mix CY 2000 Others 7% Respirat ory 4% March 2011 Diabetes Others 2% 7% DF EBITDA.8%. CVS. Key challenges are resolved at the earliest Ranbaxy is the second largest Indian company by revenue in the domestic formulations space after Cipla and ranks third in the overall ranking.. 2% Sayonara. Mix: 6/10 AI. Ranbaxy is among the market leaders in three of the largest therapy segments. pain management dominate sales The top four therapeutic segments including AI. pain management. Ranbaxy has been posting large losses in its core US business because of ongoing US FDA issues.6 Good brand equity in AI.2 17.9%. which has fallen from 5. second in the pain management segment with market share of 7% and third in the dermatology segment with market share of 8.

6 18.7 8.0 17.4 10.607 1.0 17.8 3. Ranbaxy's brand equity has taken a beating in almost all therapy areas.Ranbaxy Market share in key therapies (%) 10.6 9.9 * Average growth over 2009-2010 Pain/Analgesic Pain/Analgesic Dermatology Source: Industry/MOSL In terms of the number of prescriptions written.3 36.0 13.8 17.1 12.4 14.1 9. Over the past five years.1 26.8% and it ranks fourth in the dermatology segment with a prescription market share of 5.6 3.4 30. Ranbaxy's prescription ranking Jan-07 Anti-infectives Derma GI CNS Pain Mgmt CVS Anti-diabetic Respiratory 2 3 12 11 12 13 10 15 Jan-08 2 3 13 11 13 15 12 12 Jan-09 3 3 9 11 13 13 11 17 Jan-10 Oct-10 2 3 4 4 14 14 14 14 13 14 17 15 15 16 18 19 Source: Industry/MOSL Top 10 brands contribute 40% of the revenues Ranbaxy's top 10 brands contribute ~40% to its revenue and they feature among the industry's top 300 brands.4 22.2 -1.6 2. Ranbaxy is ranked third in the AI segment with a prescription market share of 7.4 5. Its No1 brand Revital (Vitamins) ranks sixth in the industry and it posted revenue CAGR of 30% over 2006-10.0 33.346 996 924 863 904 660 646 346 341 YoY Gr (%) CAGR (%) 29.4 56.Company Avg Gr . Most of Ranbaxy's top 10 brands recorded double-digit CAGR over the past four years.8 Growth comparison (%) (2010) Avg Gr .9 57.1 4.9 14.8 16.4%.7 18. Ranbaxy's top 10 brands Brand Revital Drug Ginseng products Product Launch 1989 1997 1999 1994 1989 1980 1990 1999 2003 1975 Sales (INR m) 1.3 13. Ranbaxy's brand equity with physicians is high only in the AI and dermatology segments.2 Source: Industry/MOSL Mox Amoxycillin Storvas Atorvastatin Volini Nsaids Cifran Ciprofloxacin injectables Sporidex Cephalexin Zanocin Ofloxacin Cepodem Cefpodoxime Rosuvas Rosuvastatin Fortwin Injectables CAGR through 2006-10 Dermatology CVS CNS CVS CNS GI AI GI AI August 2011 107 .9 7.8 7 5.0 26.4 20.Industry 20.6 15.0 5.

7 30. Revenue growth is driven by existing products and new launches.Ranbaxy 3.5 2.0 17.8 13. Distribution & reach: 7/10 Ranbaxy derives 66% of its revenue from the metros and class-I towns.6 10.0 CY09 31.0 5.0 Class II to VI 16.6 9. in line with the industry trend.4 13.4 17. Of launches in last 2yrs Avg sales per launch (INR m) 94. Ranbaxy: New launches (INR m) No.3 17.4 8.6 2.6 Class II to VI 18.0 CY10 Source: Industry/MOSL August 2011 Ranbaxy: Growth composition (%) New Launches Existing Brands 104 CY07 104 CY08 114 CY09 154 CY10 7. compared with 63% of the industry average.7 30.4 6.9 26.9 CY08 30.5 15.7 9. The contribution of metros to revenue has risen over the past five years.2 23.6 32.1 27.1 19.3 Geographical distribution of revenues: Industry (%) Metros 20.0 31.1 30.7 16.7 17.9 CY07 28.0 30.0 16.1 13.5 31.9 18. the average revenue per new launch has declined from INR94m in CY07 to INR60m in CY10.3 CY07 33. However.0 19.7 CY08 35.9 31.9 CY06 32.2 14.1 7.8 10.6 14.6 Class I Tow ns 20.5 Rural 17.0 14. Over the past four years. Introductions: 5/10 Ranbaxy has been one of the most aggressive players in the industry in launching new products Ranbaxy has aggressively launched new products over the past four years.4 73.3 19.9 19.6 CY06 28.6 36.6 17.5 21.2 32.4 32.6 Class I Tow ns 19.6 14.6 17.5 3.4 CY08 4.0 CY07 108 .6 17.4 Rural 16.7 8.3 20.5 0.5 20. Ranbaxy: Geographical distribution of revenues (%) Metros 19.5 CY07 CY08 CY09 4.5 CY10 CY07 CY08 CY09 CY10 Source: Industry/MOSL Class I Tow ns Rural 17.1 60.7 30.0 92.7 Class II to VI Rural Geography-wise growth rates Metros Class II to VI 17.1 -6.8 CY09 5. It launched 65 new products (including line extensions) annually over the past four years.0 12.2 7.6 19.2 12. revenue CAGR for all geographies has been below the industry average.0 CY10 CY09 CY10 Ranbaxy: Geography-wise growth rates (%) Metros Class I Tow ns 21.0 11.

This is lower than our forecast of 1516% CAGR for the industry.6 1.6m in CY10.6m revenue per MR.Ranbaxy 5. MR productivity declines Ranbaxy's domestic formulations revenue posted 10. Ranbaxy is likely to maintain its leading position in the sector given its strong position and market share in some of the largest therapeutic segments.2% CAGR over FY04-10 and its sales force posted 15% CAGR. of MR 4. CAGR amd scale-up: 5/10 We expect Ranbaxy's domestic formulations revenue to post 14% CAGR over CY10-12. Improvement in MR productivity: 3/10 Top-line growth driven by sale force additions.500 3. Sales force productivity No. which fell to INR3. implying negative productivity of the salesforce. led by a large field force and rapid new launches. This is partially attributed to recent additions to the sale force. Though Ranbaxy employs one of the largest field forces in the industry the company's focus on improving productivity of the salesforce needs to be enhanced for it to grow the business more profitably.950 2004 2010 Source: Company/Industry/MOSL August 2011 109 .6 Revenue per MR (INR m) 4. In CY04 Ranbaxy derived INR4. Ranbaxy: Domestic formulations revenue ramp-up Source: Company/MOSL 6.

CIS and Africa 571 480 527 621 697 Growth (%) -1.6 27.  Yet to initiate steps to exploit the bio-similars space.Ranbaxy 7.  Strong chemistry skills and backward integrated low-cost operations.7 USA 448 397 660 467 473 Growth (%) 6.9 15. Japan).8 17.  Launch of generic Lipitor with 180-day exclusivity in November 2011.8 5.9 -11. Key news flows/triggers US FDA resolution for Paonta and Dewas facility.9 -15.9 24.864 1. impacting return ratios.  Para-IV pipeline in the US market is strongest among peers.  Needs to reduce fixed costs.3 CY11 DF EBITDA 98% Source: Company/MOSL 110 .8 12.2 -29.2b in one-time PAT over CY1114 with DCF value of INR77/share.7 438 13. 5/10 Risks & concerns  Resolution of US FDA issues imperative to monetize large Para-IV opportunities in the US.0 -7.2 Total dosage 1.9 -3. Sales mix (INR m) 2008 Dosage Form India Growth (%) 2009 2010 2011E 2012E CY10-12 CAGR (%) 519 18. Sankyo.0 19.0 10.7 Latin America 74 71 83 80 102 Growth (%) 15.  Strong parentage (Daiichi.2 -9.  Impact assessment  We are neutral on Ranbaxy's international business despite its strong presence in the US and emerging markets.682 1.561 1.4 12.9 11.9 -15.4 -2.924 Growth (%) 3.1 16.  Option values (Para-IV products) to contribute INR38.708 1.6 -4.9 9.  Acquisitions have not delivered desired results. Non-domestic business snapshot Positives  Strong presence in the US and emerging markets.519 1.4 4.6 15.6 API 117 112 114 143 143 Growth (%) 12 -5 2 25 0 Allied business 4 0 0 0 0 Growth (%) 0 -100 -99 -99 -99 Total sales 1.Asia Pacific 100 100 93 102 133 & Middle East Growth (%) -9.  Further visibility on exploiting synergies with Daiichi.4 EBITDA Contribution Non-DF EBITDA 2% 368 8.9 359 -2.2 Europe. due to ongoing US FDA issues and high fixed cost in some of the European markets  We expect the international business to record 14.4 66.5 387 7. This can result in a large one-time penalty payment.3 1.1 0.407 1.750 1.066 Note .Estimates exclude Para-IV/low-competition opportunities in US except for August 2011 10.2 Japan.851 2.0 29.5% CAGR over CY10-12 excluding low-competition and Para-IV products in the US.

4 RoCE Ranbaxy one year forward P/E 120 90 60 37. will be key growth drivers.8 4. Ranbaxy RoE & RoCE (%) RoE 19. Earnings growth and stock attractiveness: 6/30 We expect overall top-line CAGR of 14. However. Para-IV upsides are attracting P/E based valuations.9 9. Our estimates exclude MTM forex gains and one-off upsides from Para-IV opportunities. Valuations imply market attaching sustainable P/E multiples to Para-IV upsides  Current valuations implies that market is attaching sustainable P/E multiples to Para-IV upsides: Given the potential recurrence of Para-IV upsides every year for the CY11-12 period. Our current DCF value of all potential Para-IV upsides is INR77/sh. leading to improved profitability and gradual recovery in the US business. albeit on a very low base. it is imperative for RBXY to resolve outstanding US FDA issues and salvage the upsides from these two opportunities which account for 80% of overall Para-IV upsides. time-lines for such a solution are not known.8 7.4 11.7 P/E (x) Avg(x) 94.4% over CY10-12.2 9.7 30 0 Feb-08 Aug-06 Mar-07 Aug-07 14. Our current DCF value of all potential Para-IV upsides is INR77/sh. We maintain Sell with target price of INR412 (20x CY12E EPS + FTF DCF value of INR77/sh).  US FDA resolution imperative: Since sustaining current valuations is dependent on upsides from Lipitor & Nexium.4 10.3 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 30.7 10.Ranbaxy 8.3x CY12E core EPS. We believe that these are one-off upsides and hence continue to value them on DCF basis.4 11. Ranbaxy management has been trying to resolve these issues. Cost cuts. leading to EPS CAGR of 53%. We believe that current valuations are discounting the best-case scenario for both the core business as well as for the Para-IV upsides.6 Peak(x) Min(x) 15.0x CY11E and 23.1 2008 2009 2010 2011 2012E August 2011 111 .  Valuations discount best-case scenario: Ranbaxy is currently valued at 33. The key near term determinant for Ranbaxy's valuations will be the expected resolution of the US FDA and DoJ issues.

7 1.008 4. The US FDA's steps resulted in the stopping of exports of US formulations from both the facilities. without which the significantly large upsides for its US business are at a risk.168 20.561 2.173 24.Para-IV Upsides in US (INR M) 20. Ranbaxy has been facing cGMP issues.000 986 4.2b over CY11-14).250 247 4. Resolution of US FDA issues imperative: We believe it is imperative for Ranbaxy to resolve its long-pending US FDA cGMP problems. we believe there are risks to high value FTF opportunities like generic Lipitor and Nexium (cumulative one-time PAT of INR38.025 2. pending the resolution of the US FDA issues at its India facilities.5 5.616 1.Core & Para-IV Profits (INR M) Core PAT Para-IV PAT 20.Ranbaxy Ranbaxy non-domestic business: key trends.007 3.991 CY11E 7.846 2. given past precedence.749 18 3 5 18 2 8 4 41 100 Ranbaxy . Ranbaxy must demonstrate that these high-value Para-IV opportunities are not at risk.348 8.168 10. Ranbaxy's US facility is the only facility that supplies products in the US.348 8.168 48.724 2.386 9. We believe getting the US business back on track through the clearance of the Paonta and Dewas facilities is crucial for the Ranbaxy management in the near-term.956 One-Time EPS 25-Nov-09 Mar-10 30-Nov-10 Nov-11 Nov-11 Sep-12 Mar-13 May-14 2. triggers & risk Getting the US business on track is key: Over the past 3-4 years. Para-IV upsides: Ranbaxy: One-time PAT from Para-IV upsides (INR m) Brand Innovator Sales (USD m) Launch CY09 CY10 CY11E CY12E CY13E CY14E Total % of total Valtrex 1500 Flomax 1452 Aricept 1900 Lipitor 5000 Caduet 304 Diovan 1300 Valcyte 300 Nexium 2800 Total 17. While the time-lines for such a resolution are not predictable.561 393 7.437 CY13E 9.489 10.168 48.702 CY14E CY09 CY10 CY11E CY12E CY13E CY14E CY10 August 2011 112 . Ranbaxy may be required to pay a one-time penalty for the resolution.724 6.489 3.0 8.846 18.489 4.007 20.2 1.348 10. which have gradually aggravated.846 3.724 4.893 1.052 CY12E 3.683 10.750 740 2.173 7.0 20. Risks to Para-IV opportunities: Given the seriousness of the US FDA issues. we note that. The management has been attempting to resolve the issues and is trying to obtain a comprehensive solution with the US FDA and the DoJ for all outstanding issues.173 7. The problems started with a warning letter for the Paonta facility and gradually aggravated into an import alert for the Paonta and Dewas facilities and culminated in the Application of Integrity Policy (AIP) being invoked for the Paonta facility.342 2.7 6.168 Ranbaxy .993 2.

Settlements for Nexium raise uncertainty AstraZeneca entered into an out-of-court settlement with Teva and recently with Dr Reddy's Labs for the potential launch of their respective generic versions in May 2014. However.941 28. raises uncertainty over upsides for Ranbaxy.4 Ranbaxy along with DRL and Teva 2. Teva and Dr Reddy's indicated that if Ranbaxy got final US FDA approval.Sensitivity Analysis Only Ranbaxy on market Innovator Sales (USD mn) Sales period (mths) Price discount (%) Potential Mkt for generics No. of players in mkt Ranbaxy Mkt Share (%) Ranbaxy Sales (USD mn) Assumed exchange rate (INR/USD) Ranbaxy Sales (INR mn) PAT Margin (%) PAT (INR mn) WACC (%) PV Factor PV of cash flow NPV (INR/share) 2.253 3.0 Source: Company/MOSL August 2011 113 .800 6 70 420 4 30 126 42 5.812 70 20.6 1. the matching launch time-lines for the three settlements (May 2014) and the fact that Ranbaxy is yet to receive even tentative approval. This raises uncertainty over Ranbaxy's FTF status and an out-of-court settlement with AstraZeneca since Ranbaxy's 180-day exclusivity on Nexium is likely to commence from May 2014.168 14 1 11.800 6 30 980 2 70 686 42 28. they would launch their generic versions after the expiry of Ranbaxy's exclusivity.292 40 2. We believe there are potential risks to the monetization of these opportunities due to ongoing US FDA issues. The table highlights the upsides for Ranbaxy in both cases: NEXIUM UPSIDE (USD m) .Ranbaxy Key FTF upsides: Nexium at risk Nexium account for a major portion of Ranbaxy's FTF upsides.117 14 0.

Leveraging Ranbaxy's distribution network to launch Daiichi products Key target markets include India. Accessing Ranbaxy's low-cost manufacturing facilities in India as a sourcing base for Daiichi. The transfer of NCE research to Daiichi will result in cost savings for Ranbaxy besides the upfront cash inflow. This plan straddles multiple areas in which the partners can leverage each other's strengths. in which Ranbaxy's front-end presence will be leveraged to distribute Daiichi's products (can also include patented products). August 2011 114 . Synergies for NCE research: Daiichi has bought Ranbaxy's NCE operations. this may be a time-consuming exercise as it will require changing Daiichi's filings for these products.Ranbaxy Long-term plan to exploit synergies with Daiichi Ranbaxy formulated a three-year plan (2010-12) to exploit synergies with Daiichi. leading to cost savings. it received some upfront consideration (not quantified) from Daiichi. 3.to medium term as Ranbaxy will have to file products with the Japanese authorities and get them approved. 4.5b) is undergoing a change with the government planning to reduce health care costs by encouraging generics. which will be timeconsuming. Shifting manufacturing to Ranbaxy's Indian facilities Ranbaxy can supply some products to Daiichi (especially APIs) from its Indian facilities. Accessing the Japanese generic market through Daiichi. We estimate Ranbaxy spends ~20% of its annual R&D expenditure on NCE research. Ranbaxy plans to become a strong player in this market by accessing Daiichi's presence and brand-equity in this market as well as its own product pipeline. Cost savings for NCE research division In July 2010. Africa. Leveraging Ranbaxy's distribution network to launch Daiichi's products. In return. Mexico and Romania. with the key target markets including India. resulting in upsides for both partners. Accessing the Japanese generic market The USD70b Japanese pharmaceutical market (with 5% generic penetration at ~USD3. We do not expect major upsides from this initiative in the short. The areas include: 1. which has now been transferred to Daiichi. 2. Africa. Latin America and parts of Europe. We believe this could result in incremental upsides to Ranbaxy in the medium term. However. Latin America and parts of Europe. The Japanese government aims to double the generic penetration over the next five years. A beginning has been made with Ranbaxy starting marketing of a few products in India. Ranbaxy transferred its NCE research operations to Daiichi along with all its NCE assets and ~150 employees. Our estimates take into account the savings in R&D cost due to the sale of NCE research operation to Daiichi.

8 0.786 17. Tax Interest/Dividends Recd.188 1.9 24. Direct Taxes Paid (Inc)/Dec in WC CF from Operations CF frm Op.355 16.969 11.063 14.736 9.271 2.2 0.577 -11.398 31.862 -1.714 20.4 11.615 -4.5 4.3 -700 9.517 62.0 2.407 21.2 11.101 -4.2 23.4 2.393 72.863 41.105 2.448 -783 2.676 4.0 7.047 647 43.209 9.001 5.785 13.616 -11.984 -35.6 2.210 5.571 45.894 7.9 2.107 142 1.926 16.8 1. Net Fixed Assets Capital WIP Investments Goodwill/Intangibles Curr.694 423 -3.2 -1.815 67.1 Balance Sheet Y/E December Equity Share Capital Fully Diluted Eq Cap Reserves Revaluation Reserves Net Worth Minority Interest Loans Deferred liabilities Capital Employed Gross Block Less: Accum.7 3.880 44.327 -20.009 61.268 81.2 145.991 69.672 80 6.3 23.733 26.328 -227 81.534 99.0 160.124 -15.985 19.913 1.846 7.152 185 10.9 15. of Funds E: MOSL Estimates 2009 2.5 2011E 11.0 0.956 12.296 -743 -743 -4.8 0.231 4.935 8.932 21.725 567 13.7 3.534 45.7 30.483 29.549 71 67.616 17.331 -6.228 12.516 -3.125 30.865 9.181 -704 -6.9 103.6 3.086 18.9 69 94 55 1.4 2.7 8.261 71 43.652 2.2 2.052 32.063 August 2011 115 .540 23.511 8.8 -1.000 -204 -1.644 12. Liability & Prov.101 7.407 18.2 20.102 2. Int.052 Ratios Y/E December Basic (INR) EPS (Fully diluted)* Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E (Fully diluted) PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2009 4.105 53.416 2010 18.5 0.1 0.105 2.644 16.035 1.436 6. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Tax Tax Rate (%) Reported PAT Minority Interest Adj PAT after Min.500 700 -10.985 19.0 -0.6 -4.138 -2.105 65.5 33.295 -4746 75.144 7.4 15.706 7.1 0.8 38.2 Cash Flow Statement Y/E December Op. Change (%) Margin (%) Adj PAT excl one-offs 2009 73.4 9.167 793 -982 9.085 2012E 2.Ranbaxy Financials and valuations: Ranbaxy Income Statement Y/E December Net Sales Change (%) Other Operating Income Total Expenditure EBITDA Change (%) Margin (%) Depreciation EBIT Int.241 71 61.4 4.971 12.615 17.0 2012E 16.2 18.9 2.293 21.446 60.incl EO Exp.7 2.098 6.105 59.434 533 36.102 41.550 24.5 7.736 7.8 4.516 16.138 9.8 19.862 8. Deprn.9 16. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2009 7.885 0 7.506 6.3 11.009 64.500 0 -2.117 35.935 493 -11.0 15.105 2.774 4.9 12.253 70.205 24 -4.063 -2.008 (INR Million) 2011E 83.8 15.050 21.5 2.124 2.991 2012E 90.8 20.309 41.800 9. Account Payables Provisions Net Current Assets Appl.033 -51.769 6.101 85.7 4.7 10.231 4.5 10.166 -459.290 -1.112 32.849 27.8 7.120 -793 2.905 6.290 8.506 2012E 11.416 10.9 132.350 29.708 104.328 -227 85.4 1.6 -812 2010 85.416 32.393 1.8 2.9 3.139 32.5 0.138 -20.4 23.417 567 23.0 7.4 10.399 12.781 44.442 12.132 76.035 22.Rec.170 34.7 26.785 -3.085 69.1 0.695 783 0 -6.050 -51.302 -22.931 10.479 3.1 9.0 10.375 6.974 75.141 204 1.676 68.226 21.911 -38.500 1.332 13.2 2.Profit/(Loss) bef.803 81.231 5.0 6.052 1.8 5.815 (INR Million) 2011E 2.111 -2.033 3. PBT pre EO Expense Change (%) Extra Ordinary Expense PBT after EO Exp.871 71 56. (Inc)/Dec in FA (Pur)/Sale of Investments CF from Investments Change in networth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin.294 1.081 -6.009 86.0 1.6 10.795 16.8 70 95 73 2.063 3.050 28.138 7.855 467.0 2.675 43.533 13.1 70 95 83 1.750 4.348 -227 99.985 19.286 23.2 3.506 14.6 92 92 33 1.632 15.644 (INR Million) 2011E 9.795 -1.955 18.100 -1.9 11.0 2010 25.1 2.913 0 -4.823 1.517 2010 2.652 161.818 4.602 18. and Forex loss Other Income .

4 17.725 81.5 3. It launched 22 new products (including line extensions) annually over the past four years.5 5. Perf.4 03/10A 68.670 Neutral 6/10 Dr Reddy's Laboratories (DRL) derives 72% revenue from the acute therapy segment and has small presence in chronic therapy segments through the CVS segment. (INR b) M.12 Rel.7 4. Stock info Equity Shares (m) 52-Week Range (INR) 1. Over the past two years DRL's revenue growth has been driven largely by old products rather than new launches.6 68. (%) (X) 334 11. DRL has a large field force with 3.0 EV/ EV/ (INR M) (INR M) (INR) GR.754 03/13E 90.5 3.2 RoE (%) 2.7 5.1 14.4 16.4 1.6 7. In other major segments its brand equity is not very strong.855/1.0 65. Reddy's is a vertically integrated company with presence across the pharmaceutical value chain through its core businesses of Global Generics.8 18.2 729.0 21. DRL ranks third in the GI and pain management segments with a prescription market share of 4.3 4.165 MRs which helps it to tap both the urban and semi-urban market.8 Sales EBITDA 3. GI. The company is currently developing bio-generics and NCEs.1 Background Dr.6. and Proprietary Products. The company's distribution in metros has increased significantly over time and the contribution of other geographies to revenue has fallen over the past four years.615 2.179 03/11A 74. DRL has good brand equity in the GI and pain management segments but is not a market leader in these therapeutic segments.323 13.Cap.3 PAT EPS EPS P/E Adj P/E P/BV (X) 716. US. Europe and Russia. DRL has not been able to improve its brand equity in most after therapeutic areas in which it is present.7 17.7 15. (%) M. August 116 .7 17.1% respectively. (USD b) 168. D: Distribution & reach 6/10 I: Introductions 4/10 DRL derives 68% of its revenue from metros and tier-I cities.9 17.099 11. Key focus markets include India. Pharmaceutical Services & Active Ingredients (PSAI). DRL launched fewer new products over the past four years than its peers.4% and 4. pain management and AI contribute ~64% to DRL's domestic formulation revenue.320 Financial & valuation summary Year Net Sales End 5/4/20 243.693 03/12E 81.5 23.5 (X) 5. CVS.2 21.2 2.6 20.5 RoCE (%) 2.Cap.1 17.5 24.1 22.Domestic Formulations | New Peaks MEDICINES CAPSULE Dr Reddy's 4/10 E: Equity with doctors MEDICINES Score 52/100 DRRD IN The homecoming M: Mix CMP: INR1.7 22.6 16.446 TP: INR1.

Stock performance (1 year) Dr Reddy’ s Labs 2.Dr Reddy's Chairman Profile Chairman Dr. recent additions to field force and considering the management's increased focus on the business. The company scaled up its business rapidly albeit on a low base.6m in 2004 to INR3. given its small base. a first generation entrepreneur. S: Stock Attractiveness Return ratios are muted due to a high cost German acquisition. backed by a strong API portfolio. N: Non-domestic business 7/10 E: Earnings growth 5/10 We are positive on DRL's international business given its strong US and emerging markets portfolio. We expect non domestic business to record 15. At this level. Revenue per MR declined from INR3. The number of MRs grew 16% against revenue growth of 13. The day-to-day operations of the company are currently managed by Mr.750 1. DRL is valued at 20. DRL posted negative MR productivity over 200410. leading to EPS CAGR of 11%. in line with the industry.670. We now rate the stock Neutral with TP of INR1.5x FY13E consolidated earnings. indicating a fall in sales force productivity.500 1.9b to sales and INR5.Rebased 12/20 Aug-11 August 2011 117 .000 Aug-10 Nov-10 Feb-11 May-11 Sensex . DRL's core earnings growth will be driven by sustained double-digit growth in the branded formulations business but will be partly tempered down by higher taxes. Prasad (Vice Chairman & CEO) and Mr. productivity is the lowest among peers. Satish Reddy (MD & COO). We expect DRL to post top-line of 15% CAGR over FY11-13. excluding Para-IV upsides. We expect DRL to post revenue CAGR of 15% over FY11-13.7x FY12E and 17. C: CAGR and scale-up 6/10 I: Improvement in productivity 2/10 DRL outperformed the industry with revenue CAGR of 18% over FY05-11. excluding low-competition and Para-IV products in the US. which is not yielding desired returns.000 1.6%. Anji Reddy.250 1. Reddy's Labs was promoted by Dr. G. Building a strong business in US and Russia coupled with global scale in the API business are the key achievements of the company. Option values (low-competition and Para-IV products in US) will contribute INR12.2m in 2010.2% CAGR over FY11-13.V. We had placed our recommendation "Under Review" for a potential downgrade (from Buy earlier) some time back.4b to PAT in FY12.

7 10.5 2. EBITDA Contribution Non-DF EBITDA 77% DF EBITDA 23% The homecoming Balancing focus between overseas and domestic markets Despite being one of the largest Indian generic companies. Mix: 4/10 Acute therapeutic segments dominate sales The top four therapeutic segments. DRL lagged the industry average growth rate over the past four years in all geographies except metros.31 2. We estimate contribution of 23% to EBITDA.0 2.6 14. GI. 1.3 8. However. Reddy's: Therapeutic breakup FY01 FY05 Diabetes 7% AI 8% Pain 17% CVS 22% Derma tology 5% Respira tory 4% VMN 6% Others 9% GI 22% Among laggards in the segment compared with peers DRL ranks thirteenth in the industry and has a market share of 2. has strong brand equity in the gastrointestinal and pain management segments. DRL posted revenue CAGR of 18% over the past six years.17% in 2010.2 2. the GI and respiratory segments increased their contribution from 19% in FY01 to 29% in FY11 while contributions from pain management and anti-infective segments fell from more than 32% in FY01 to 20.Dr Reddy's India formulations snapshot Domestic formulations: Revenue contribution marginal. CVS.17% market share. DRL's focus on growing the international generic business had resulted in low focus on the domestic formulations business in the past which has impacted overall business growth.2 20. which is visible from its growth up-tick in 2009 and 2010.6% in FY11.31% in 2006 to 2. of late.6 Diabetes 6% AI 8% Pain 13% CVS 19% 2006 2007 2008 2009 2010 Source: Company/Industry/MOSL August 2011 118 . ranked a distant thirteenth in the industry with 2. pain management and AI contribute ~63% to DRL's domestic formulations revenue.4 2. Over the past five years DRL's market share dropped from 2. Dr Reddy's Laboratories (DRL) has been lagging its peers in the domestic formulations business. the acute therapeutic segments contribute ~72% to sales. DRL market growth share and Diabetes 5% AI 15% Derma tology 3% Respi ratory 1% VMN 9% Others 13% Pain 17% CVS 19% GI 18% FY11 VMN 5% Stomatologicals 5% Respiratory 5% Dermatology 6% Others 10% GI 23% Mkt Share (%) Grow th (%) 18. DRL.17%. Dr. it has been expanding in the domestic market. Overall. Over the past 10 years. against the industry's 14% CAGR. sizable contribution to profits The domestic formulations business contributes just ~15% to DRL's revenue but is one of its most profitable businesses.

1 16.0 4 3 15.Industry 23. In other major segments the brand equity is not very strong. Equity with doctors: 6/10 Good brand equity in GI.4 GI Pain/Analgesic Dermatology GI Pain/Analgesic Dermatology Source: Industry/MOSL * Average growth over 2009-2010 DRL does not have high brand equity except in the GI and pain management segments in terms of the number of prescriptions written. DRL has not improved its brand equity in most therapeutic areas in which it is present.4% and 4. Over the past two years. Six out of the top 10 brands reported double-digit revenue CAGR over the past two years.6 Growth comparison (%) (2010) Avg Gr .Company Avg Gr . DRL's growth in key segments like the GI and pain management segments has been lower than that of industry. Its No1 brand Omez (Omeprazole in the GI segment) ranks twenty-seventh in the industry and has been posting revenue CAGR of 17% over the past two years.7 18.4 4.5 17.6%. Market share in key therapies (%) (2010) 5. pain management segments DRL is not a market leader in any therapeutic segment. August 2011 119 . It ranks third in the GI segment with market share of 5.1% respectively. DRL's prescription ranking Jan-07 Pain Mgmt GI Respiratory Vit CVS Anti-diabetic Anti-infectives Derma 3 5 10 9 10 11 17 23 Jan-08 3 3 9 8 11 13 15 19 Jan-09 3 4 10 11 12 15 16 22 Jan-10 Oct-10 3 3 4 3 11 10 14 11 12 13 14 13 16 16 19 21 Source: Industry/MOSL Higher brand concentration DRL's top 10 brands contribute ~37% to its total revenue and seven of its top 10 brands feature among the industry's top 300 brands. A major drawback in DRLs portfolio is that it is not among the top 10 players in any major chronic therapeutic segment.Dr Reddy's 2. DRL ranks at third position in the GI and pain management segments with prescription market shares of 4. eighth in the pain management segment with market share of 4% and tenth in the dermatology segment with market share of 3%.

3 32.1 31.2 23.9 17.1 Rural 16.5 1.6 CY06 28.5 31.5 33.5 2.8 31.2 1.7 9.4 15.8 9.7 CY07 CY08 -7.6 30.0 30.6 17.2 13.8 8.6 32.1 17.9 CY07 28. DRL: Geographical distribution of revenues (%) Metros 20.3 31.4 7.1 30.3 20.1 7.5 31.3 6.9 27.5 17.0 CY06 CY07 CY08 CY09 CY10 CY10 DRL: Geography-wise growth rates (%) Metros Class I Tow ns Class II to VI Rural 34.6 14.4 Rural 17. Distribution and reach: 6/10 DRL derives 68% of its revenue from metros and class-I towns.6 19.4 14.5 Industry: Geographical distribution of revenues (%) Metros 20.6 37.9 CY08 30.0 20.0 15.3 19.7 17.9 16.2 15.0 20.0 0.8 17.4 Class II to VI 17.4 6.0 11.6 42.7 21.5 13.5 16.6 10.5 17.7 17.5 20.6 32.2 9. Over the past four years revenue CAGR for all geographies have been either in line or below the industry average.0 19.2 Class I Tow ns 20.5 15.1 7.9 16.6 7.0 CY09 CY10 CY07 CY08 CY09 CY10 Source: Industry/MOSL August 2011 120 .9 Class I Tow ns 20.1 19.6 34.4 1.Dr Reddy's DRL's top 10 brands Brand Drug Product Launch 1992 1996 1994 2005 1996 2002 2000 1989 2005 Sales (INR m) 1.0 CY09 31.8 16.2 13.4 15.7 Industry: Geography-wise growth rates (%) Metros Class I Tow ns Class II to VI Rural 26.6 9.2 10.1 32. against an industry average of 63%.6 74.0 17.2 19.6 4.6 32.9 19.065 700 507 405 377 328 285 278 209 200 YoY Gr (%) CAGR (%) Omez Omeprazole Nise Nimesulide Stamlo Amlodipine Reditux Rituximab Omez-D Omeprazole & Domperidone Stamlo Beta Atenelol & Amlodipine Razo Rabeprazole Atocor Atorvastatin Mintop Minoxidil Razo-D Rabeprazole & Domperidone CAGR through 2009-2011 14.4 Source: Company/MOSL 3.5 Class II to VI 18.5 20.7 6.

0 19.2 18.Dr Reddy's 4. led by new launches and strengthening of its field force (600 MRs added over the past few quarters to total ~3.1 CY10 CY08 CY09 CY07 Source: Industry/MOSL 5.2 DRL: Growth composition (%) New Launches Existing Brands 7.3 63 CY10 7. Dometic formulation revenues DF Revenue (INR m) 26. CAGR and scale-up: 6/10 DRL is aggressively targeting strong growth in the domestic formulations business and expects double-digit growth.2 5.158 FY10 11.3 1. considering the management's increased thrust on the business and relatively low base.4 2.4 34 CY07 26 CY08 54 CY09 28. Introductions: 4/10 DRL's growth over the past four years has been led by existing products as It launched fewer new products compared with the industry Over the past four years DRL launched 22 new products (including line extensions).0 5.0 13. Of launches in last 2 yrs Avg sales per launch (INR m) 138. annually which is less than its peers.7 15.323 FY13E Source: Company/MOSL August 2011 121 . DRL: New launches No.210 FY12E 15. DRL's revenue growth has been largely driven by existing products rather than new launches. The average revenue per new launch has fallen over the past four years. We expect DRL's domestic formulations business to post revenue CAGR of 15% over FY11-13. Over the past two years.526 FY06 6.1 16.8 142.060 FY08 8.8 15.964 FY07 8.7 26.7 6.690 FY11 13.5 19.6 5.0 YoY Grow th (%) 5. indicating a sharp decline in value derived out of new launches. We expect DRL to report in line industry growth over the next two years.000).478 FY09 10.

 DRL's past acquisitions have not delivered the desired results.2 1.  It is among the top three global API players.9 -2.300 1.2m in FY10.  Ramp-up in supplies to GSK for emerging markets expected in FY13.165 16. which fell to INR3.  DRL's CRAMS business may not scale-up due to a conflict of interest with a strong generic business. low-cost operations. DRL: Sales force productivity (2004-10) No.  It is one of the few Indian players to target the bio-similar opportunity. of MRs 3.5 3. Non-domestic business snapshot: 7/10 Positives  DRL has a strong presence in the US and emerging markets.1 2004 2010 DRL Industry Source: Company/Industry/MOSL 7.Dr Reddy's 6.  It has a pragmatic mix of low-competition.  DRL has yet to tie up with a global player to capitalize on the bio-similar opportunity in regulated markets.6m revenue per MR.7b revenue by FY13.  News flow/triggers  Launch of generic Zyprexa in US with 180 days exclusivity expected in October 2011  US FDA approval for generic Arixtra in the US expected in FY12. Para-IV and normal products for the US market. which has impacted return ratios. Improvement in MR productivity: 2/10 DRL's sales force productivity fairs poorly compared with the industry DRL's domestic formulations business posted revenue of 13. Compared with the companies covered in this report. In 2004.6% CAGR over FY04-10 and its sales force grew 16% CAGR.0 11. They are related to potential price erosions in the tender market.  Further visibility on DRL's achieving US$2. implying negative productivity of the salesforce.  It has strong chemistry skills and fully backward integrated. DRL derived INR3.6 Revenue per MR (INR m) Sales force addition CAGR (%) Productivity Improvement CAGR (%) 3. DRL's performance was below average. Risks and concerns Further write-offs for DRL's German operations cannot be ruled out. August 2011 122 .

they do not fully discount the slowdown in DRL's core business.4 17.354 EU 11.688 9.844 16.460 27.7x FY12E and 17.9 24.690 13.  We expect the non-domestic business to record 15.996 20.0 2.6 14.7 Feb-10 Aug-09 Aug-10 Feb-11 Aug-11 Aug-06 Aug-07 2008 2009 2010 2011 2012E 2013E Aug-08 -12.0 7.705 2.220 30.5 P/E (x) Avg(x) Peak(x) 77.5 23. Earnings growth and stock attractiveness: 17/30 Traction in the branded formulations and US businesses will be key growth drivers for DRL over the next two years.5 5.5 16.171 2.887 FY10-13 CAGR (%) 6.886 9.145 25.  Option values (low-competition and Para-IV products) will contribute INR12.638 US 19.Estimates exclude Para-IV/low-competition opportunities in the US Non-DF EBITDA 77% Source: Company/MoSL 8-9.8 5.427 29.284 Others 893 1.2 10. We now rate the stock Neutral with TP of INR1.383 FY10 20.5 -2.268 1.758 17.Dr Reddy's Impact assessment  We are positive on DRL's international business given its strong US and emerging markets portfolio backed by a strong API portfolio. The stock trades at 20.3 4 August 2011 123 . We had placed our recommendation "Under Review" for a potential downgrade (from Buy earlier) some time back.499 19.7 6.1 15.441 70.582 11.158 11.060 22.210 15.029 17. Our core estimates exclude upsides from patent challenges/low-competition opportunities in the US.817 18. adjusting for the interest cost of the bonus debentures and factoring-in the impact of likely withdrawal of DEPB scheme.730 26.375 17.655 2. While current valuations are supported by large potential one-time opportunities in the US.7 15.9b to DRL's sales and INR5.987 14.631 Total 69.754 90.4 19.9 4.643 8.0 EBITDA Contribution DF EBITDA 23% International 16.1 Dr Reddy's one year forward PE 84 22.4b to PAT in FY12.646 FY11 19.648 2.277 74.323 International 9.323 Note .693 81.0 44 24 Negative Earnings Cycle 16.0 4.6 16.9 2.532 21.750 FY13E 22.2 Min(x) 64 9.478 10.913 29.303 Generics 31. Sales mix (INR m) FY09 PSAI India 18.6 in FY12 and INR81.5x FY13E core earnings.708 34.431 8. Dr Reddy's RoE & RoCE (%) RoE RoCE 24.1 in FY13.4 Mar-07 Feb-08 Feb-09 25.2% CAGR over FY11-13 excluding low-competition and Para-IV products in the US.427 2.905 19.758 2. We estimate core EPS of INR68.404 2.619 FY12E 20.627 India 8.540 Branded Formulations 18.670 (20x FY13E core EPS + INR47/sh of DCF value).223 16.

The main target markets for the company's emerging market initiative include Russia and the CIS region. Strong positioning in emerging markets led by a focused approach We expect DRL's formulation exports to emerging markets to record 18% CAGR over FY11-13 led by a ramp-up in its Russian operations and the start of supplies to other emerging markets under the GSK supply agreement. DRL has begun to focus on the Russian OTC market (with the addition of more products and expansion of the field force) and has in-licensing arrangements to expand its product portfolio in the region.7b in revenue by FY13. One-off and low-competition opportunities in the US are likely to contribute ~USD286m in FY12 and ~USD173m for FY13. We have excluded such opportunities from our core estimates and forecast that DRL will post core US revenue of 27. We believe this is a slightly aggressive target given that most of its businesses are growing at much lower than 27% CAGR. triggers & risk Revenue target of USD2.5% CAGR over FY11-13. we estimate DRL's core revenue will grow at 15% CAGR to USD2. Venezuela and Brazil. US business to ramp-up significantly over the next two years DRL's revenue target of US$1b in the US implies 55% CAGR over FY11-13. Russia. A combination of scale-up in existing patent challenge/low-competition products and new opportunities will help the company to achieve its revenue guidance of USD1b by FY13 in the US.9b and ~INR7. Russia and the CIS region is a key market for the company.3b to PAT in FY12 and FY13 respectively. We expect revenues of USD2. To sustain double-digit growth in this region. led mainly by its FTF pipeline of 12 products and contribution from other low-competition opportunities. it will be difficult for DRL to achieve USD2.Dr Reddy's DRL non-domestic business: key trends.2b in FY13 including the upside from low competition opportunities.7b by FY13 implies 27% CAGR DRL aims at a top-line of USD3b by FY13 implying 27% revenue CAGR over FY11-13.6b in sales and INR5. Low-competition/patent challenge opportunities in the US gain momentum DRL management has guided for launch of at least one patent challenge/low-competition product in the US every year over the next few years. We believe that without some inorganic initiative.4b and INR2. Hence.1b. DRL has a pipeline of 11 FTFs. August 2011 124 . CIS key markets With 76 percentage contribution to DRL's emerging market exports. Such opportunities are likely to contribute ~INR12.

038 169 225 FY13E 4.889 7. Supply of remaining products (contributing ~USD35m in revenue) will have to be suspended till the import alert is resolved. While the high cost acquisition of Betapharm seems to have been mistimed. the US FDA has issued a warning letter for the remaining four deviations. of which ~USD30m is from Naproxen.488 715 172 206 1. August 2011 125 . which is not included in the import alert. with gross margins of 25-30%. Germany: Cost structure aligned for a pure generic model Over the past three years.277 DRL US portfolio . DRL can continue to supply this product to its customers. incomplete cleaning validation for some manufacturing equipment. The warning letter has identified the following cGMP lapses at this facility: non-validation of analytical methods to test APIs.one-time pat contribution (INR m) Product Generic Arixtra Generic Accolate Generic Zyprexa Generic Prevacid Generic Exelon Generic Clarinex Generic Geodon Generic Lipitor Total Launch Status Launched in Jul-2011 Launched Likely launch on 23-Oct-2011 Launched on 15-Oct-2010 Expected in August 2012 Expected in January 2012 Expected in Mar 2012 Expected in May 2012 FY12E 310 366 3. the German operations will not be a drag on the company's PAT in the coming years.063 101 79 5. implying EBITDA hit of USD8m-10m on annual basis. However.100 917 12.421 FY13E 1. out-of-specification investigations data did not include analysis of all available data.598 Source: Company/MOSL Import alert for Mexico facility to temper core performance DRL's Mexico facility recently received a warning letter and subsequently an import alert from the US FDA. DRL has significantly altered its German operations through cost cutting to align it with the low-margin pure generic market.Dr Reddy's DRL US portfolio .one-time revenue contribution (INR m) Product Generic Arixtra Generic Accolate Generic Zyprexa Generic Prevacid Generic Exelon Generic Clarinex Generic Geodon Generic Lipitor Total Launch Status Launched in Jul-2011 Launched Likely launch on 23-Oct-2011 Launched on 15-Oct-2010 Expected in August 2012 Expected in january 2012 Expected in Mar 2012 Expected in June 2012 FY12E 1.503 1. Our estimates factor in the impact of this development for DRL.005 3. Of these. contrary to past trend. This is the fallout of the US FDA inspection done in November 2010 wherein it issued 12 observations. we believe that. This facility generates annual revenue of ~USD65m. These are low-margin products for DRL. DRL was able to resolve 8.721 731 7.122 358 60 124 385 229 2. and lack of responsibility of the quality unit to ensure API manufactured were in compliance with GMP.

8 8.370 18.0 8.6 89.5 549 72.460 CF from Oper.071 42. Liability & Prov.073 15.322 8.716 5.513 132 57 12.3 10.9 4.679 58.693 6. 20.936 Other Current Liabilities 10.9 (INR Million) 2012E 81.080 5.3 3.438 59.6 24.184 43.695 1.001 -4.1 15.217 38.2 2013E 81.712 51.572 87 75.235 916 (INR Million) 2012E 15.4 Net Fixed Assets 22.5 17.678 14.659 -14.531 8.558 23.713 5.1 5.5 2. Activity 103 -5.7 2.0 16.5 493 66.144 45.355 1.973 -301 -7.968 13.0 Balance Sheet Y/E March Equity Share Capital * Reserves Net Worth Loans Deferred Liabilities/Tax Capital Employed 2010 844 42.9 0.726 8.191 15.0 1.2 4.584 5.7 3.628 10.649 75.159 15.107 11.460 (inc)/dec in FA -6.403 11.534 -9.217 82.048 69.403 -6.182 (Pur)/Sale of Investments -3.9 10.480 8.6 304.9 14.246 42.584 6.421 19.028 15.990 23.9 12.4 2.220 712 0 13.525 23.612 -12.202 Interest/Dividends Recd.855 0 0 0 -3.6 21.159 -13.572 87 82.7 1.974 Appl.068 -120.258 15.139 22.2 22.774 Account Payables 9.2 2013E 90.057 2.386 2013E 18. Financials prior to FY09 are as per US GAAP E: MOSL Estimates Inc/Dec of Cash 988 496 -82 Add: Beginning Balance 5.132 2013E 846 57.2 2011 65.7 8.277 1.032 -4.202 20.1 109.000 23.5 2.845 13.5 2011 74.620 926 -1.725 18.245 0 0 0 -4.4 0.763 1.548 Cash Flow Statement Y/E March 2010 Op.755 -1.615 5.5 13.706 16.17.5 16.650 15.629 CF from Operations 17.6 14.647 6.533 14.8 4.2 Ratios Y/E March Basic (INR) EPS Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio Current Ratio (x) Debt/Equity (x) 2010 6.2 15.157 (INR Million) 2012E 846 50.612 8.407 24.5 2.993 9.053 -151.4 66 69 75 2.973 Curr.0 4.560 16.360 to IFRS Curr.877 0 -3.184 * IFRS reporting from FY09 onwards. & Amortization EBIT Net Interest Exp Forex (Gains)/Losses PBT & EO Expense Change (%) PBT after EO Expense Tax Tax Rate (%) Reported PAT Adjusted Net Profit Change (%) Margin (%) 2010 70.584 7.463 13.915 14.1 0.953 11.6 17.2 2.2 0.3 2.1 4.057 22.615 4.2 62 69 62 2.959 14.814 806 -158 10.1 29.068 1.384 15.843 Goodwill/Intangible Assets 13.754 9.9 271.439 75 -72 2.7 0.065 -163 -2.089 16.099 939.7 22.729 Closing Balance 6.0 10.748 16.259 18.3 81.355 7.115 59.439 505.3 11.2 62 66 71 1. 614 Direct Taxes Paid -985 (Inc)/Dec in WC 3.246 47.955 309 15.245 0 -9.774 3.7 345.370 -155 -1.048 2011 846 45.2 2012E 68.3 1.706 1.8 28.371 11. of Funds 59.960 6.555 10.1 16.621 20.500 -11.036 11.6 95.361 6.075 14.001 1.959 -9.246 45.620 20.0 0.647 Note: Reported cashflow differs due to acquisitions & change reporting from FY09 onwards August 2011 126 .2 14.9 254.566 3.941 10.155 -1.839 Net Current Assets 18.053 985 48.6 29.769 Investments 3.1 0.8 86 78 90 2.439 1. incl EO Exp.596 6.2 29.323 10.649 29. Profit/(Loss) before Tax 14.8 13.2 17.089 -853 14.Dr Reddy's Financials and valuations : Dr Reddy's Income Statement Y/E March Net Sales Change (%) Other Income Total Expenditure EBITDA Margin (%) Deprec.647 7.5 15.463 24.572 87 69.2 0.4 23.006 -1.2 12.729 8.2 617 56.059 17.065 20. Assets Inventory Account Receivables Cash and Bank Balance Others 38.177 2011 15.191 15.386 -3.295 Change in networth (Inc)/Dec in Debt Other Items Dividend Paid CF from Fin.113 CF from Investments -9.659 1.

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2 3. Stock info Equity Shares (m) 52-Week Range (INR) 1.4 15.8 390/242 10/22/20 85.6 RoE (%) 14.6 12. AI and respiratory segments dominate the sales mix. with market share of 11. Glenmark has gradually improved its prescription ranking in the gynecology and CVS segments over the past four years.6. The company has pipeline of 5 Novel drugs in different phases of clinical studies.5%. It launched 26 new products annually over the past four years.9 7.1 Background Glenmark is one of the second tier integrated pharmaceutical companies which has differentiated itself through its success in NCE research.612 11.5 16. which is above average compared with the industry. Glenmark has a field force of 2.4 11. (%) M.5 17.3 16. in which it ranks second in the industry. gastro and dermatology segments has fallen significantly.1 RoCE (%) 12. contributing 76% of the company's revenue. August 2011 128 . It is also one of the leading Indian generic companies in US with focus on niche generics segments.2 2.2 29.4 17. Glenmark has tried to diversify its therapeutic mix as the contribution to revenue from the respiratory. (INR b) M.3 17.548 4.007 40.2 22.8 2.2 3. Glenmark lags other leading companies when it comes to brand equity among doctors.310 3.1 19. Perf.078 MRs.584 5. Distribution in metros has increased significantly over time while the contribution of other geographies to revenue has fallen.4 P/E (x) 27.616 29.12 Rel.6 4.491 37.5 19.693 3. Glenmark's revenue growth is led by both existing products new launches over the past four years. The only therapeutic segment in which Glenmark has made its mark is dermatology.7 13.7 10. Glenmark has been trying to expand its presence in chronic therapy segments.9 Financial & valuation summary Year End 03/10A 03/11A 03/12E 03/13E Net Sales PAT EPS (INR m) (INR m) (INR) 24.1 P/BV (x) 3.3 EV/ EV/ Sales EBITDA 4. (%) 174.0 17.3 25. Over the past 10 years. Glenmark has reasonable presence in semi-regulated markets.1 17.8 1.7 EPS Gr. (USD b) 269. D: Distribution & reach 5/10 I: Introductions 6/10 Glenmark has better distribution in metros and tierI cities as it derives 70% of the revenue from such areas.Cap.7 16.Cap.Domestic Formulations | New Peaks MEDICINES CAPSULE Glenmark Pharma CMP: INR318 TP: INR310 MEDICINES Score 49/100 GNP IN Needs to improve returns ratios M: Mix 2/10 Neutral 3/10 E: Equity with doctors Acute therapeutic segments such as dermatology. However.6 2. Glenmark has launched fewer new products compared with some of its peers.

1x FY13E consolidated earnings. Glenn Saldanha (CMD). Revenue per MR improved from INR3. outperforming the industry.1m in 2004 to INR3. Maintain Neutral with a target price of INR310 (15x FY13E EPS plus DCF value of Crofelmer and Para IV products). The company scaled up its business rapidly albeit on a very low base. Glenmark's MR growth was 14. We expect international formulation business to record 17% CAGR over FY11-13. CEO C: CAGR and scale-up 6/10 I: Improvement in productivity 5/10 Glenmark has outperformed the average industry growth with revenue CAGR of 18. Stock performance (1 year) Glenmark Pharma 400 350 300 250 200 Aug-10 Nov-10 Feb-11 May-11 10/20 Sensex .3% CAGR over FY11-13 leading to EPS CAGR of 25. S: Stock Attractiveness Return ratios have been muted due to the workingcapital intensive nature of Glenmark's operations. Developing a strong NCE pipeline coupled with expanding presence in the US and emerging markets are the key achievements. We expect Glenmark to post revenue CAGR of 17% over FY11-13. Glenmark is valued at 19. Glenmark has shown marginal increase in MR productivity over the past six years.8%. At this level productivity is in line with average.Glenmark Pharma CEO Profile Glenmark was founded by Mr.7x FY12E and 16. indicating improved productivity. given its low base and aggressive focus on driving growth in this business. Gracias Saldanha (Founder & Chairman Emeritus) and is being currently managed by Mr.6m in 2010. It is the most successful NCE research company from India till date. Reduction in interest costs in the long-term will partly drive earnings growth.3%.2% compared with revenue growth of 17. N: Non-domestic business 3/10 E: Earnings growth 7/10 We are neutral on Glenmark's international business despite its ramp-up in emerging markets due to the low return ratios in these markets. Option values include potential NCE out-licensing and the launch of Crofelemer in some emerging markets.6% over FY0511.Rebased Aug-11 August 2011 129 . We expect topline of 18.

Interestingly. CVS. the company improved its market share from 1.4 1.5 August 2011 130 . the contribution of CVS and AI segments increased while that of respiratory. account for about 76% of Glenmark's domestic formulation revenue. Glenmark's profitability from the domestic formulations business is lower than from its regulated market generics business. Glenmark is among the few companies to have improved the productivity of its workforce over the years. Glenmark's revenue posted 19% CAGR and the industry posted 14% CAGR. 1. respiratory segments dominate sales Acute therapeutic segments.53%.5 2006 2007 2008 2009 2010 1. Acute segments contributes 76% to the revenue GI 10% Others FY01 7% Derma tology 37% Glenmark ranks twentyfifth in the domestic formulations segment Glenmark ranks twenty-fifth in the domestic formulations market and has a market share of 1. EBITDA Contribution Non-DF EBITDA 73% DF EBITDA 27% Needs to improve return ratios Ranks 25th in the domestic market Glenmark is a niche player in the domestic formulations segment with strong presence in a few niche therapeutic areas like dermatology. dominate Glenmark's sales mix. It ranks twenty-fifth in the industry with market share of 1. CVS.53%. dermatology. dermatology.9 Grow th (%) 21. Its top therapy segment. unlike other leading generic companies.26% in 2006 to 1.Glenmark Pharma India formulations snapshot Domestic formulations contribute ~30% to revenue The domestic formulations business. contributes 29% to total revenue. in which Glenmark has 76% market share.53% currently. over the past five years. Over the past six years.3 1. Mix: 2/10 Acute therapeutic segments account for 76% of revenue. Glenmark has improved market share over the last 5 years Gynae cology 9% Gynaeco logy 5% Pain 13% FY05 GI 7% Others 3% Dermatol ogy 33% Pain 4% Diabetes 0% Respira tory 22% AI 11% CVS 0% Diabetes 8% Respirat ory 15% AI 11% CVS 5% FY11 Gynaec 5% Pain 6% GI 3% Others 6% Dermatology 28% Diabetes 6% Mkt Share (%) 25. is a leading contributor to Glenmark's topline and profitability. However. Glenmark has been trying to expand its presence in chronic segments. which contributed 30% to Glenmark's revenue in FY11 and an estimated 27% to EBITDA.26 1. The company has been gradually increasing its presence in chronic therapy areas.1 18. gastro and dermatology segments fell. including dermatology.5 17 AI 14% Respiratory 15% CVS 17% Source: Company/Industry/MOSL 1. AI and respiratory segments. The top four therapeutic segments. AI. Over the past 10 years.8 20.

Equity with doctors: 3/10 Glenmark lags in terms of brand equity except in dermatology Glenmark lags leading companies covered in this report in terms of brand equity. Glenmark ranks ninth with market share of 2.Company Avg Gr .5%.Industry 25.4 2.8%.Glenmark Pharma 2. It has improved its prescription ranking in the gynecology and CVS segments over the past four years.8 Respiratory Dermatology Respiratory Dermatology Source: Industry/MOSL * Average growth over 2009-2010 Glenmark has maintained its strong brand equity in the dermatology segment over the years with prescription ranking of No2 and 8% of the prescription market share.3 16. In the respiratory segment.2 18.5 Growth comparison (%) (2010) Avg Gr . in which it ranks second in the industry with market share of 11.4 18. Glenmark's prescription ranking Jan-07 Derma Anti-diabetic Gynaec Respiratory CVS Anti-infectives 2 9 16 11 Jan-08 2 9 12 11 24 23 Jan-09 2 9 9 14 21 23 Jan-10 2 Oct-10 2 10 10 11 8 13 13 20 17 20 23 Source: Industry/MOSL August 2011 131 . The only therapeutic segment in which Glenmark made its mark is dermatology. Market share in key therapies (%) 11.

5 15.3 18. Glenmark: Geographical distribution of revenues (%) Metros 19.5 2.6 17.3 15.3 17.6 Geographical distribution of revenues: Industry (%) Metros 20.1 25.1 7.5 Rural 17.0 14.5 27.7 26.9 CY08 30.5 17.0 25.6 Class II to VI 18.2 Class I Tow ns 20.7 Class II to VI 15.7 17.0 CY06 CY07 CY08 CY09 CY10 CY06 CY09 CY10 Glenmark: Geography-wise growth rates (%) Metros Class I Tow ns 38.2 Class I Tow ns 20. Glenmark launched 26 new products annually on average over the past four years. Average revenue per new launch has risen over the past four years from INR66m to INR90m.3 18.2 40.7 11.5 17. Over the past four years revenue CAGR for all geographies except rural areas has been better than that of the industry average.1 10.7 16.4 27.5 7.2 28.8 Industry: Geography-wise growth rates (%) Metros Class I Tow ns Class II to VI Rural 26.2 34.6 14.5 12.9 19.5 12.3 20.0 26.3 30.7 7.6 32.7 15.6 43.5 Rural 14.5 Class II to VI Rural 31.9 9.5 -1. Introductions: 6/10 Glenmark's revenue growth from new launches has been gradually declining over the past few years Glenmark's revenue growth was led mainly by new launches in CY07. August 2011 132 .5 31.9 CY07 28.5 27.Glenmark Pharma 3.1 19.0 31.2 23.5 27.7 32.6 19.3 12.0 20.0 19.5 15.4 25.6 32.1 CY07 CY08 CY09 CY10 CY07 CY08 CY09 CY10 Source: Industry/MOSL 4.6 28.4 13.3 16. CY08 and CY09 but in CY10 the contribution of existing brands to revenue growth was higher than that of new launches.4 16.0 31.3 19.0 43.4 32. Distribution and reach: 5/10 Glenmark derives 70% of its revenue from metros and class-I towns against the industry average of 63%.

454 6.0 16.372 7.447 9. We believe the company can sustain its out-performance of the industry by changing its therapeutic mix in favor of chronic therapeutics segments and consistent improvement in workforce productivity.7 5. implying improvement in salesforce productivity.Glenmark Pharma Glenmark: New launches No. which went up to INR3.1m per MR.3 Glenmark: Growth composition (%) New Launches Existing Brands 8.967 5/10 August 2011 133 .9 17.290 5. in 2004. We expect Glenmark's domestic formulations business to post 17% CAGR over FY11-13 against the industry's 15-16% CAGR. Glenmark derived sales of INR3.0 18.7 96.3 65.8 9.5 12.4 9.937 4.2% CAGR.5 57 CY07 52 CY08 46 CY09 53 CY10 CY07 CY08 CY09 8. Of launches in last 2 yrs Avg sales per launch (INR m) 98.1 Grow th (%) 16.7 90.1 12.2 11.6m in FY10. 11.2 18.6 7.7 CY10 Source: Industry/MOSL 5.529 8. Glenmark's MR productivity improvement is visible from the fact that.3% CAGR over FY04-10 and its sales force strength increased by 14. Glenmark: domestic formulations performance DF revenue (INR m) 27.562 3. much faster than the industry average.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL 6. Improvement in MR productivity: Glenmark's above-average MR productivity leads growth Glenmark's revenue from the domestic formulations business grew at 17. CAGR and scale up: 8/10 Glenmark posted domestic formulation revenue CAGR of 19% over FY05-11.

 Impact assessment  We are neutral on Glenmark's international business given the working capital intensiveness of its emerging market business. Glenmark has generated upfront and milestone income of USD187m from NCEs so far.2 3.  One of the most successful NCE players from India despite setbacks on some NCEs.1 11.  Option values include potential NCE out-licensing and the launch of Crofelemer in some emerging markets.Glenmark Pharma Glenmark: Salesforce productivity No.078 2010 2.  We expect the international formlation business to record 17% CAGR for FY11-13.6 Sales force addition CAGR (%) Productivity Improvement CAGR (%) 14.5 936 2004 2. Risks and concerns  Working capital intensive operations.  Signing of NCE out-licensing deals with MNCs.  Launch of Calcipotriene ointment in the US makes Glenmark the sole supplier.  Launch of generic Malarone in the US under agreement with GSK.7 Glenmark 1. Key news flows/triggers Stoppage of Oxycodone supplies by other generic players in the US will make Glenmark the sole player. Non-domestic business snapshot: 3/10 Positives  Trying to build a differentiated portfolio in the US by targeting niche segments of dermatology.  Glenmark is gradually ramping up its presence in emerging markets. especially in emerging markets  NCE out-licensing has become difficult and time-consuming. oral contraceptive and controlled substances. which may lead to higher R&D expenses in coming years. August 2011 134 .9 Industry Source: Company/Industry/MOSL 7. of MRs Revenue per MR (INR m) 3.

3 12.1% CAGR in the generic business and 18% CAGR in branded generic business.7x FY12E and 16. which will put pressure on its operations in the short to medium term as it will have to fund R&D expenses for these NCEs on its own until they are out-licensed.658 478 10.116 7.070 9.1x FY13E earnings.5 18.908 5.163 9.026 660 40.0 8.370 810 3.160 FY10 21.907 22.048 11. Glenmark has differentiated itself among Indian pharmaceutical companies through its success in NCE research (resulting in licensing income of USD187m so far).303 India 6.259 15.355 Generics 7.610 2.6 21.3% topline CAGR over FY11-13 led by 17.372 Europe-branded 996 Latam-branded 1.363 1.491 FY12E 30.7 8.989 14.1 15.529 1.188 Branded 11.2 17.337 895 29.7 35.7 160 P/E (x) Avg(x) Peak(x) Min(x) 13.592 19.230 299 2.1 20.1 Feb-09 Feb-10 Aug-08 Aug-09 Aug-10 Feb-11 Aug-11 Glenmark Pharma one year forward PE RoCE 17.4 14.296 401 8. EPS CAGR is estimated at 26% over FY11-13.0 40 37.0 17. Expect 26% EPS CAGR over FY11-13: We expect Glenmark to record 18.719 561 12.188 11. High debt and high working capital are our key concerns for Glenmark.3 120 80 137.669 2.475 36.3 20. Glenmark Pharma RoE & RoCE (%) RoE 17.616 FY11 25. Given this success. Earnings growth and stock attractiveness: 17/30 Sustaining growth in existing businesses and funding of NCE research expenses has resulted in high leverage for Glenmark.562 1.4 23.4 0 Mar-07 Feb-08 Aug-06 Aug-07 13.821 19.580 Semi-regulated mkts 2.972 NCE Income 0 Gross Sales 21. Glenmark has been aggressive in adding new NCEs to its pipeline. Debt has particularly increased after the credit crisis of FY09 and has not reduced significantly since. Low return ratios is our main concern.3 EBITDA Contribution DF EBITDA 27% Non-DF EBITDA 73% Source: Company/MoSL 8-9.0 2009 2010 2011 2012E 2013E August 2011 135 .8 17.0 9.885 Latin America 400 North America 7.Glenmark Pharma Sales mix (INR m) FY09 Formulations 19.478 5.168 990 4.967 1.352 544 3.1 16.447 1.528 1.627 0 24.4 7.795 2.4 18.919 4.963 8.873 343 7.864 7. We believe the key determinant for Glenmark's valuations will be its ability to de-leverage without sacrificing growth traction.338 Europe 147 API 1.923 13. The stock is valued at 19. High interest costs and likely absence of strong forex gains will temper down the strong operational performance for FY12.906 FY13E FY11-13E CAGR (%) 35.9 17. Maintain Neutral with a target price of INR310 (15x FY13E EPS+ DCF value of INR14 for Para-IV pipeline and crofelemer).361 3.

Innovator's summary motion rejected. Glenmark seems to be the only filer till and date Not an FTF product. Only one other generic filing till date Glenmark has FTF. We estimate Glenmark's US portfolio (exupsides from one-off FTF opportunities) to post revenue of 21% CAGR over FY11-13. Settled out-of-court with innovator. Sued on 12-Dec-08. NDA approval awaited. Received final approval on 10-May-2010.3b. we are cautious about these product categories given the complexities of manufacturing and the stretched US FDA approval time-lines for ANDA approvals. Received final approval on 02-May-2011. It has a pipeline of six Para-IV products (of which five are FTFs) targeting an innovator market size of USD2. GSK sued Glenmark on 17-Aug-09. triggers & risk Trying to build a differentiated portfolio in the US Glenmark is focusing on filing products in the niche segments of dermatology. Glenmark: Para IV pipeline Product Indication Brand Innovator Market Size (USD m) 1500 Status Ezetimibe Cholesterol Zetia Schering (Merck) Has tentative approval with FTF. Court case started in May-10.005% Dermatology Cutivate Nycomed 48 Atovaquone Proguanil HCl Oxycodone Hydrochloride Capsules & Liquid Solution Anti-malarial Malarone GSK 58 250mg/100mg tablets NA Pre-1938 product 13 August 2011 136 . Glenmark will pay mid-teens royalty to Nycomed. Sued on 22-Mar-07. Launch scheduled in Sep-2011 with 180-day exclusivity. Glenmark's partner Lehigh Valley Tech (LVT) has filed NDA with US FDA since it is a pre-1938 product. If successfully approved all other generic players will have to file ANDAs referencing Glenmark's product & hence could give Glenmark ~18 months of indirect exclusivity. No AzG. Settled out-of-court on 12-Apr-10. Signed licensing & cost-sharing deal with Par Pharma on 04-May-10 for small upfront payment. ANDAs filed/marketed (includes partner filings) As of 31 March 2009 Dermatology Controlled substance Modified release Hormones Para-IV FTF Normal generics Total 18 6 2 7 9 45 87 As of 31 March 2010 20 9 6 15 9 46 105 As of 31 March 2011 21 3 9 15 13 48 109 Source: Company/MOSL Para-IV pipeline not significant Unlike some of its peers. Launch scheduled on 12-Dec-2016 Glenmark is FTF and was sued on 07-Dec-07. 30-month stay expired in May-2010. Glenmark has not focused on developing a strong patent challenge pipeline for the US. Federal Jury ruled against Glenmark in Jan-2011 and awarded Abbott USD16m in damages post which Glenmark has stopped further sales. Par to share risks/costs of litigation as well as profits. Product has to be manufactured in the US as it is a controlled substance Tradolapril + Verapamil Antihypertensive Tarka Abbott/ Sanofi 58 Fluticasone lotion 0. Glenmark launched "at-risk" in Jun-10. However. controlled substances and hormones for the US market. 30-month stay period expired in Oct-2010. Settled out-of-court with Nycomed for potential launch in Mar-2012. This coupled with a few FTF filings are expected to be key growth drivers for the US business.Glenmark Pharma Glenmark non-domestic business: key trends. District Court Judge's ruling will determine the final outcome with losing party having right to appeal to the Federal Circuit Court Glenmark seems the FTF.

Glenmark. Royalty amount/ percentage not disclosed Glenmark not sued till date.5months prior to the expiry of '673 patent. Astra sued 8 generic players in Apr-10 for the '152 patent expiring on 02-apr-2018 and '618 patent expiring on 17-Dec.Teva. The '314 patent expiring in 2016 has been upheld by court. August 2011 137 . Royalty will be minimum 30% Settled with Sepracor on 9th Aug 2010. Roxane. Aurobindo. Mylan. or after 30-May-2014 if Sepracor obtains pediatric exclusivity. DRL has tentative approval Perriogo seems to be the FTF. Glenmark's 30-month stay expires in Nov-2011 Source: Company/MOSL Eszopiclone tablets Insomnia Lunesta Sunovion 787 Hydrocortisone Butyrate Eczema Locoid (Dermatology) Lipocream Cholesterol Crestor Astellas /Triax 38 Rosuvastatin Calcium AstraZeneca 3600 Atomoxetine HCl AttentionDeficit/ Hyperactivity (ADHD) Dermatology Strattera Eli Lilly 530 Fluocinonide Vanos Medicis 30 Tarka has witnessed negative news flow On 15 January 2011. Glenmark & Taro have also settled with launch scheduled in Dec-2013. Settled with Lupin.Glenmark Pharma Glenmark: Para IV pipeline Product Indication Brand Innovator Market Size (USD m) 93 Status Calcipotriene ointment Dermatology Dovonex Leo Pharma Leo Pharma discontinued marketing in 2007 when annual revenues were USD93m as it planned to shift prescriptions to a combination but has not been successful. Synthon.Dec-10 Glenmark has FTF. Glenmark currently is the only approved product on the market. The federal jury rejected Glenmark's challenge to the validity of a Sanofi patent that expires in February 2015. Glenmark had argued that the patent covered an invention that was protected by an expired patent. Glenmark's 30month stay expires in Nov-2012. No timelines known 9 generic players have FTF status alongwith Glenmark. Cadila. Wockhardt. Wockhardt and Sun. Apotex. but Glenmark will have to pay royalty to the innovator. Patent litigation is on. The District Court judge will now have to either accept or reject the jury ruling on this aspect of invalidation and give a ruling on other aspects of the case. There will be no AzG. Taro & Nycomed. Settled out-of-court on 25-May-2011 with launch scheduled in 3QFY12.2021. Current revenue run-rate will be much lower than USD93m (likely to be USD25m for FY11) as the product has not been promoted for the past 3 years. Patent expires on 03-Jun-2014. Glenmark to receive small milestone income prior to launch & then royalty on Taro's sales. a US jury ruled against Glenmark on one of the contentions of the patent litigation for generic Tarka (a USD58m brand) at a US District Court (lower court). Other Para IV filers are Teva. Other generic players with Para-IV filings include Glenmark. DRL. Orchid. Perrigo has settled with launch scheduled in Dec-2013. which is 2. Sandoz. Cobalt. Abbott markets the drug in the US and sought USD25m as compensation from Glenmark and the US jury awarded damages of USD16m. Lupin. Sued on 04-Nov-10. It has tied up with Taro exclusively for branding & promoting the product. Received tentative approval on 22. The final outcome of the case will depend on what the judge rules on all the aspects of the case (the ruling is expected in next few weeks). The 30-month stay expires in May2013. Actavis. Cobalt and Teva. Many generic filings with Para-IV status . As per settlement Glenmark can launch after 30-Nov-2013.

received NDA approval for Oxycodone 5mg capsule and 100mg/5mL oral solution in June 2010. Lehigh Valley Technologies (LVT). For FY11. The US FDA will issue a warning letter to the remaining generic players to withdraw their versions from the market after it is convinced that it will not lead to drug shortages and that Glenmark/LVT will be able to meet the demand.75m PAT per quarter. enhancing the size of the opportunity to US$25m-30m over the next 12 months. Background to the NDA filing Since Oxycodone is a pre-1938 product all generic players launched their generic versions in the US without US FDA approvals. which has been approved. a successful NDA approval will force the remaining generic companies to withdraw from the market and re-file their products with reference to LVT's approved NDA. LVT will make the product and while Glenmark will have exclusive distribution rights for these dosages in the US (market size of USD13m/year). August 2011 138 . US FDA approval time-lines for ANDAs is approximately for 18-24 months. Glenmark/LVT will enjoy indirect exclusivity for the dosages until other generic players receive new approvals. (B) Calcipotriene Glenmark is the only US FDA approved player in the Calcipotriene ointment market.may be able to raise prices Being the sole player in the market. Current revenue run-rate will be lower than US$93m (likely to be USD25m) as the product has not been promoted over the past three years. This will result in Glenmark/LVT being the only approved Oxycodone player in the market for the next 24 months. As part of this process. Sole player . Glenmark generates US$5m in revenue per quarter from generic Tarka with about 55% PAT margins resulting in USD2. Identifying niche opportunities in the US Besides Para-IV filings. It has met with some success in this strategy with Oxycodone and Calcipotriene. low-competition opportunities in the US is a key focus area of Glenmark's US strategy. identifying niche. It has tied up with Taro exclusively to brand and promote the product. The US FDA has been gradually trying to get the products approved. Glenmark has temporarily halted sales of generic Tarka until the District Court judge gives a ruling.Glenmark Pharma Glenmark undertook an "at-risk" launch of generic Tarka in the US in June 2010. LVT filed an NDA for the 5mg capsules and 100mg/5mL oral solution with the US FDA. (A) Oxycodone Glenmark's US partner. As per US FDA guidelines. Glenmark is the only approved product on the market. Absence of other generic players (for ~24 months) will give it an opportunity to raise prices of Oxycodone. This product will qualify as a niche (high margin) opportunity targeted by Glenmark in the US market. we estimated one-time PAT of USD8m from this opportunity for Glenmark. The jury ruling implies potential damages of USD16m which Glenmark will have to pay Abbott if it loses the case. Leo Pharma discontinued marketing in 2007 when annual revenue was USD93m as it planned to shift prescriptions to a combination of Calcipotriene & Betamethasone but has not been successful.

Total Estimated s t o n e s Deal Value Initially Merck KgA 31 . India. in UK Thrombosis Cardiovascular Disorders Osteoarthritis. Most successful NCE company from India so far Glenmark has been one of the most successful NCE companies from India.DPP IV Inhibitor Rheumatoid Arthritis. Phase I in Neuropathic pain & Netherlands Respiratory disorders Asthma. Phase I completed Neuropathic pain in UK Crohn's disease & Phase I completed Multiple Sclerosis in US Acute Stroke/ To initiate Phase-I Coronary Syndrome.NCE Pipeline Snapshot Molecule Indication Clinical Trials Out-licensing Partner Licensing Income (USD m) Upfront Mile. This is despite its being a relatively late entrant in this segment compared with the likes of Ranbaxy and Dr Reddy's. Czech Republic and Philippines - Tedalinab (GRC 10693) GRC 15300 GBR 500 GBR 600 GRC 17536 Oglemilast GRC 6211 Crofelemer in Aug-2011 Neuropathic pain. While Glenmark has not disclosed financial details of its tie-up with Taro. post Phase-IIb Incontinence Adult acute Completed Phase III infectious diarrhoea. Partner stopped Neuropathic pain. in FY12 Initially targeted for Neuropathic pain Osteoarthritis. Asthma Phase-IIb completed Initiated Phase-II trials in UK. Osteoarthritis and To initiate Phase-II Inflammatory pain. in US and Phase IIb HIV-related diarrhoea in India - - - Sanofi Sanofi 20 50 - - 325 613 - - - - Forest/Teijin 16 25 Clinical development stopped Clinical development stopped Eli Lilly 45 In-licensed from Napo Pharma 15 Glenmark holds rights only for 140 RoW markets and not for regulated markets 25 Source: Company/MOSL Total 177 August 2011 139 . Phase-I completed. Poland.- Melogliptin (GRC 8200) Revamilast (GRC 4039) Diabetes .Glenmark Pharma We expect Glenmark/Taro to launch this product in FY12. clinical development Dental pain. COPD Partner stopped clinical development post Phase-IIb Osteoarthritis.Partner returned but molecule returned molecule to Glenmark . we believe the royalty will be fairly remunerative. It will receive a small milestone income prior to launch and then royalty on Taro's sales. generating ~USD202m in upfront and licensing income over the past decade. Glenmark .

Revenue ramp-up will be phased from FY13/14 and is likely to take a few years.5 PV (INR m) 0 0 Total PV (INR m) 2. Relatively low profitability (compared with other NCEs) given the difficulty in manufacturing such products and lower flexibility in pricing the product since it is related to HIV.8 6 14 3 4 42.1 279 FY20 80 0 80 80 30 24 6 18 FY21 80 0 80 80 30 24 6 18 FY22 80 0 80 80 30 24 6 18 Patent Expiry 5 3 14 2 3 43.Crofelemer DCF Valuation (USD m) FY11 FY12 Total Market Size 0 0 Regulated Markets Semi-regulated Markets (SRM) Glenmark . outlicensing of some of these NCEs is imperative to control the expected increase in R&D costs. It does not hold rights for the product in regulated markets. they will put pressure on Glenmark's P&L in the short to medium term as it will have to fund R&D expenses for these NCEs on its own. Crofelemer: Not a big opportunity Glenmark has in-licensed this NCE from Napo and holds distribution and marketing rights for 140 emerging markets. Glenmark has.Glenmark Pharma Out-licensing of NCEs imperative to control R&D costs Glenmark has a pipeline of Eight NCEs undergoing clinical development.484 Total PV per share (INR) 9 FY13 15 0 15 15 30 5 1 3 FY14 75 50 25 25 30 8 2 6 50 10 10 15 0. Glenmark . the company has been prompted to aggressively add new NCEs to its pipeline.2 328 FY19 380 300 80 80 30 24 6 18 300 10 15 5 22 14 8 8 36.3 386 FY18 380 300 80 80 30 24 6 18 300 10 30 15 5 22 14 7 9 37.0 44. indicated peak revenue of USD80m from this product (across unregulated markets that Glenmark will target). Payment of single-digit royalty on sales by Glenmark to Napo.9 137 Source: Company/MOSL August 2011 140 . Since NCE research has been a differentiating factor for Glenmark compared with its peers.9 161 18 14 11 4 32. in the past. and since it is the most successful NCE research company from India so far.0 177 FY15 150 100 50 50 30 15 4 11 100 10 18 15 2 13 14 4 7 40. 3.0 109 18 14 9 5 35. We believe the profitability of this product for Glenmark will not be very high due to: 1.Upside from SRM Revenues EBITDA Margin (%) EBITDA Royalty to Napo at 8% of revenues (assumed) PAT Glenmark .0 189 18 14 10 5 33. We estimate the DCF value of this opportunity at INR9/share for Glenmark. As these NCEs progress in clinical trials. A launch across 140 emerging markets will be phased. we believe. 2.5 415 FY17 380 300 80 80 30 24 6 18 300 10 30 15 5 22 14 6 10 38.7 302 FY16 255 175 80 80 30 24 6 18 175 10 30 15 3 20 14 5 11 39. Hence. We do not expect a big upside for Glenmark from this opportunity.Upside from Regulated Markets Salix/Napo's revenues Cost of API (%) Glenmark's revenue from API supplies PAT margin (%) PAT from API supplies Total upside for Glenmark WACC (%) Year 0 1 PV of cash inflow 0 0 Exchange Rate (INR/USD) 45.

Glenmark Pharma Strong growth in emerging markets but working capital intensive Glenmark's revenue in emerging markets have grown 4x over FY05-11.6 11.8 6.1 40. We expect this portfolio to record 19% revenue CAGR over FY11-13.9 17. These include markets like Latin America. the portfolio has been growing steadily over the years.6 20. We believe Glenmark must strike an optimum balance between growth and working capital in these markets. resulting in slower progress on this front. we believe this growth traction has been partly achieved by expanding working capital in the business leading to increased borrowings.7 15.4 10. due to the credit crisis.6 7.4 18. While Glenmark is attempting to reduce its working capital requirements. albeit on a low base. working capital key concerns High net debt of over INR18b and net working capital of ~INR18b are key concern areas. we believe it may not be easy for it to reduce it significantly without sacrificing growth. However. Barring a slowdown in FY09.8 21. Africa.5 18. Russia and the CIS and parts of eastern and central Europe. partly impacted by a potential rupee appreciation against the US dollar. Australasia.0 16.6 24.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company/MOSL August 2011 141 . High debt.8 4. Sales ramp-up v/s net working capital (INR b) Revenue (Ex-NCE income) Non Cash WC 34.5 28.

Glenmark Pharma

Financials and valuations: Glenmark Pharma
Income Statement (INR Million) Ratios
Y/E March Basic (INR) EPS (Fully diluted)* Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E (Fully diluted) PEG (x) Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2010 11.6 15.9 87.6 2.0 3.8 2011 12.5 15.8 75.4 3.7 5.2 2012E 16.1 19.9 99.7 3.7 3.5 2013E 19.7 23.9 121.4 5.0 5.1

Y/E March 2010 2011 2012E 2013E Net Sales 24,616 29,491 37,007 40,693 Change (%) 18.0 19.8 25.5 10.0 Materials Consumed 8,061 9,918 11,396 13,211 Personnel Expenses 3,425 5,103 5,613 6,455 R&D Expenses 1,200 1,386 1,899 2,442 Other Expenses 5,966 7,161 8,288 9,608 Total Expenditure 18,653 23,568 27,196 31,716 EBITDA 5,963 5,923 9,811 8,977 Change (%) 76.4 -0.7 65.7 -8.5 Margin (%) 24.2 20.1 26.5 22.1 Adjusted EBITDA 5,963 5,028 7,336 8,317 Margin (%) 24.2 17.6 21.2 20.8 Depreciation 1,206 947 1,086 1,186 EBIT 4,757 4,976 8,725 7,791 Interest 1,640 1,566 1,482 1,276 OI & forex gains/losses 722 1,405 562 646 PBT before EO Expense 3,839 4,816 7,805 7,162 Change (%) 42.8 25.4 62.1 -8.2 PBT after EO Exp. 3,839 4,816 7,805 7,162 Tax 529 237 994 976 Tax Rate (%) 13.8 4.9 12.7 13.6 Reported PAT 3,310 4,578 6,812 6,186 Adj PAT** 3,310 3,548 4,584 5,612 Change (%) 194.3 7.2 29.2 22.4 Margin (%) 13.4 12.4 13.3 14.0 ** - Excl NCE upsides & incl adjustment for R&D exp capitalization

25.5 3.5 20.1 4.2 3.6 17.7 1.2

19.7 0.7 15.9 3.2 2.8 10.4 1.2

16.1 0.7 13.3 2.6 2.5 11.1 1.6

14.1 12.7

17.4 13.4

17.0 15.3

17.1 16.3

1.5 160 105 266

1.5 140 100 203

1.7 126 103 185

1.8 125 103 189

Balance Sheet
Y/E March Equity Share Capital Fully Diluted Eq Cap Reserves Net Worth Minority Interest Loans Deferred liabilities Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Intangibles (net) Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates August 2011 2010 269 284 23,282 23,551 130 18,693 710 43,085 21,586 3,929 17,656 6,224 181 7,259 24,210 7,085 10,783 1,069 5,273 5,186 4,987 200 19,023 43,085 2011 270 284 20,102 20,372 267 21,258 -1081 40,816 25,899 4,876 21,023 1,100 309 10,329 25,988 8,070 11,308 1,959 4,651 7,605 7,560 44 18,384 40,816

(INR Million)
2012E 270 284 26,678 26,948 267 18,258 -1081 44,391 28,399 5,962 22,437 1,100 309 9,606 30,608 10,407 12,772 1,752 5,676 10,063 9,663 400 20,545 44,391 2013E 270 284 32,549 32,819 267 15,758 -1081 47,763 30,899 7,148 23,751 1,100 309 8,934 33,643 11,483 13,936 1,535 6,689 11,041 10,591 450 22,602 47,763

4.7 0.8

3.4 1.0

3.0 0.7

3.0 0.5

Cash Flow Statement
Y/E March 2010 Op. Profit/(Loss) before Tax 5,963 Interest/Dividends Recd. 722 Direct Taxes Paid -388 (Inc)/Dec in WC -2,441 CF from Operations 3,857 CF frm Op.incl EO Exp. (Inc)/Dec in FA CF from Investments Change in Networth Inc/(Dec) in Debt Interest Paid Dividend Paid CF from Fin. Activity 3,857 -3,970 -3,970 4,386 -2,151 -1,640 -126 468 2011 5,923 1,405 -2,029 1,530 6,829 6,829 810 682 -7,521 2,701 -1,566 -236 -6,621

(INR Million)
2012E 9,811 562 -994 -2,368 7,012 7,012 -2,500 -2,500 0 -3,000 -1,482 -236 -4,718 2013E 8,977 646 -976 -2,275 6,373 6,373 -2,500 -2,500 0 -2,500 -1,276 -315 -4,090

Inc/Dec of Cash 354 890 Add: Beginning Balance 715 1,069 Closing Balance 1,069 1,959 Note: Reported cashflow differs due to acquisitions reporting from FY09 onwards

-207 -217 1,959 1,752 1,752 1,535 & change to IFRS

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MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

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